FILE NO. 70-9697
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 5
TO
FORM U-1
APPLICATION/DECLARATION UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
WITH RESPECT TO THE ISSUANCE OF RATE REDUCTION BONDS
AND RELATED TRANSACTIONS
The Connecticut Light and Power Company
107 Selden Street
Berlin, CT 06037
Western Massachusetts Electric Company
174 Brush Hill Avenue
West Springfield, MA 01090
Public Service Company of New Hampshire
1000 Elm Street
Manchester, NH 03101
(Names of companies filing this statement and
addresses of principal executive offices)
NORTHEAST UTILITIES
(Name of top registered holding company)
Cheryl W. Grise
Senior Vice President, Secretary and General Counsel
Northeast Utilities Service Company
107 Selden Street
Berlin, CT 06037
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders, notices
and communications to:
Jeffrey C. Miller, Esq. Randy A. Shoop
Assistant General Counsel Assistant Treasurer - Finance
Northeast Utilities Service Company Northeast Utilities Service Company
P.O. Box 270 P.O. Box 270
Hartford, CT 06141-0270 Hartford, CT 06141-0270
Richard J. Wasserman, Esq.
Day, Berry & Howard LLP
CityPlace I
Hartford, CT 06103-3499
The application/declaration, as amended, in this file is amended and restated
as follows:
I. DESCRIPTION OF PROPOSED TRANSACTIONS
A. Introduction
1. The Connecticut Light and Power Company ("CL&P"), Western Massachusetts
Electric Company ("WMECO"), and Public Service Company of New Hampshire ("PSNH"
and, together with CL&P and WMECO, each a "Utility" and collectively the
"Utilities"), each an electric utility subsidiary of Northeast Utilities
("NU"), a public holding company registered under the Public Utility Holding
Company Act of 1935, as amended (the "Act"), hereby submit this application/
declaration (this "Application") pursuant to Sections 6(a), 7, 9(a), 10, 12(f),
12(g) and 13(b) of the Act and Rules 90 and 91 thereunder with respect to the
following proposed transactions: (a) the formation of several new
subsidiaries, which are expected to be limited liability companies (each a
special purpose entity, or "SPE"); (b) the acquisition by each Utility of the
equity interests in one or more SPEs; (c) the issuance by the SPEs of "electric
rate reduction bonds" or "rate reduction bonds" ("RRBs") or other related debt
instruments and the sale of such RRBs or other instruments either to investors
or to a special purpose trust created by one or more agencies of the relevant
state; and (d) the entry by each of the Utilities into servicing agreements and
administration agreements with the SPEs. The Utilities further request that
the Securities and Exchange Commission (the "Commission") grant such other
authorizations as may be necessary in connection with the transactions
described herein. As described in greater detail herein, the authorizations
sought relate to the issuance of RRBs in stranded cost securitization
transactions in connection with electric utility restructuring in Connecticut,
Massachusetts, and New Hampshire. The Commission has recently authorized
similar rate reduction bond transactions. See West Penn Power Company, HCAR
No. 27091 (October 19, 1999); Central and South West Corporation, HCAR No.
27168 (April 20, 2000).
2. In a previous proceeding under the Act - see Northeast Utilities, et al.,
Application/Declaration on Form U-1, as amended, File No. 70-9541 (the "Use of
Proceeds Filing"), granted and permitted to become effective in HCAR No. 27147
(March 7, 2000) (the "Use of Proceeds Order") - the Utilities sought and were
granted authorization related to the use of proceeds from various restructuring
transactions, including the issuance of the RRBs described herein. The
authorizations sought in the Use of Proceeds Filing - and granted by the
Commission in the Use of Proceeds Order - related to the capital restructuring
of the NU system in connection with electric utility restructuring in
Connecticut, Massachusetts, and New Hampshire and the related required asset
divestitures and the issuance of RRBs in such states. As described in the Use
of Proceeds Filing and in paragraphs 15 and 16 below, the Utilities will use
the proceeds of such divestitures and issuances of RRBs, among other things, to
reduce and adjust their capital structures by retiring outstanding debt,
preferred stock and common equity, and to buy down existing power purchase
agreements with independent power producers.
B. Background
3. The states in which CL&P, WMECO, and PSNH operate - Connecticut,
Massachusetts, and New Hampshire, respectively - have enacted legislation that
restructures the electric industries in such states by introducing retail
competition in electricity generation. (1) The new laws allow customers to
choose their electric suppliers. Accordingly, energy prices will be based on
competitive market forces rather than being set by the appropriate regulatory
commission. The transmission and distribution of electricity will continue to
be provided by the local utilities at regulated rates. The restructuring
statutes also require electric utilities to institute rate reductions in
amounts that vary from state to state. More detailed accounts of the
restructuring of the electric industries in Connecticut, Massachusetts, and
New Hampshire are contained in the Use of Proceeds Filing.
(1) An Act Concerning Electric Restructuring, 1998 Conn. Acts. 98-28
(Reg. Sess.); The Massachusetts Electric Industry Restructuring Act, 1997
Mass. Acts 164; N.H. Rev. Stat. Ann. ("RSA") 374-F.
In New Hampshire, the enactment of RSA 374-F was followed by several
governmental actions relating to electric industry restructuring, including:
(1) the initiation by the New Hampshire Public Utilities Commission (the
"NHPUC") of Docket No. DR 96-150, an administrative proceeding to consider
restructuring; (2) the issuance by the NHPUC on February 28, 1997 of a
restructuring order in Docket No. DR 96-150; (3) the enactment in 1999 of
1999 N.H. Laws 289, including RSA 369-A, which made certain changes to the
law regarding implementation of restructuring and authorized the NHPUC to
consider whether implementation of securitization will result in benefits to
customers and to issue an order approving securitization, subject to the
enactment of future enabling legislation; (4) the execution and delivery by
the Governor of New Hampshire, the Staff of the NHPUC, the Company, and
certain other parties of an Agreement to Settle PSNH Restructuring dated
August 2, 1999 (the "Settlement Agreement"), which is designed to, among
other things, to provide resolution to all major issues pertaining to PSNH
in Docket No. DR 96-150 and to result in the restructuring of PSNH in
compliance with the objectives of the legislature and the NHPUC; (5) following
the execution and delivery of the Settlement Agreement, the initiation by the
NHPUC of Docket No. DE 99-099, an administrative proceeding to consider the
Settlement Agreement, including the securitization proposal contained therein;
(6) the issuance by the NHPUC on April 19, 2000 of an order in Docket No.
DE 99-099 (Order No. 23,443) approving, with modifications and conditions,
the Settlement Agreement (the "Settlement Order"); (7) the enactment in
2000 of 2000 N.H. Laws 249, which, among other things, includes securitization
enabling legislation, RSA 369-B; and (8) the execution and delivery by the
parties to the Settlement Agreement of a conformed Settlement Agreement dated
August 2, 1999 and conformed as of June 23, 2000 (the "Conformed Settlement
Agreement"), to reflect changes and corrections made during hearings before the
NHPUC in Docket No. DE 99-099, the requirements of 2000 N.H. Laws 249, and the
Settlement Order.
4. Prior to restructuring, electric utilities had monopolies to provide retail
electric service within their service areas, with rates for retail sales of
electricity established through the regulatory process. This generally
enabled electric utilities to recover energy costs, costs of operations,
depreciation attributable to capital costs, taxes, and a reasonable return on
capital investment through its rates. Electric utilities were often required
by the states in which they operate to construct generation facilities and
enter into long-term contracts to buy power from non-utility generators.
In a regulated market, electric utilities could expect to recover these and
other prudently incurred costs through rate setting procedures.
5. In light of the transition to the new competitive environment, electric
utilities will have certain "stranded costs" - i.e., costs that would have been
recoverable in a regulated environment but are not expected to be recoverable
as a result of the introduction of competition in the generation market. Such
stranded costs may include previously incurred costs associated with generation
facilities that have market values below their book value, costs associated
with contracts to purchase electricity at above-market prices, and other
external costs. To facilitate the transition, the restructuring statutes
contain provisions which permit electric utilities to recover some or all of
these costs through the collection from consumers of electricity located within
the service area of the electric utility of a non-bypassable special charge
(the "Transition Charge") (2) that is based on the amount of electricity
purchased by consumers, regardless of whether such consumer continues to
purchase electricity from that electric utility.
(2) Connecticut, Massachusetts, and New Hampshire use different terms to
refer to analogous securitization-related concepts. Generic, non-state-
specific defined terms are used throughout this Application to refer to
such concepts.
6. The restructuring statutes in Connecticut, Massachusetts, and New Hampshire
each provide for the use of securitization to facilitate utility
restructurings.(3) Under these securitization provisions (with respect to
each state, the "Securitization Act" and, collectively, the "Securitization
Acts"), electric utilities may petition the state public utilities commission
for an order authorizing and setting forth the details of the securitization
transaction (such order, a "Financing Order").(4) Generally, the use of
securitization produces an immediate reduction in electric utilities' revenue
requirements by replacing higher cost capital with lower cost RRBs, thereby
helping to achieve the overall rate reduction envisioned by electric industry
restructuring.(5) Thus, securitization is an important component of electric
industry restructuring which allows utilities and regulators to work
collaboratively to reduce customer rates and speed the introduction of
competition.
(3) See 1998 Conn. Acts. 98-28 (Reg. Sess.), Section 8-14, codified at
Conn. Gen. Stat. Sections 16-245e to 16-245k; 1997 Mass. Acts 164, Section 193,
codified at M.G.L. c. 164, Section 1G-1H; RSA 369-B.
Securitization is the financing of a specific asset or pool of assets,
through the issuance of securities, frequently referred to as "asset-backed
securities" ("ABS"). For debt service and repayment of principal, these
securities rely solely on the revenue stream underlying the asset or pool of
assets, and as a result, their ratings are dependent upon the predictability
or volatility of that associated cash flow. The structure of a typical ABS
transaction is based on the underlying assets and the expected cash flows to
be generated by those assets. In general, the original owner of the underlying
asset sells the asset to a special-purpose financing entity. That entity then
issues securities (directly or indirectly), for which the primary source of
payment of principal and interest is the cash flow generated by the underlying
asset that was sold.
(4) See infra note 6 and accompanying text.
(5) See paragraph 15 below.
7. The Securitization Acts each contain several important characteristics that
are necessary in order for any securities issued as part of a securitization
transaction to achieve investment grade ratings. These include the following:
o A portion of the Transition Charge may be securitized (such portion, the
"RRB Charge"). The right of the utility to collect the RRB Charge is
irrevocable, pursuant to a pledge by the relevant state (as discussed in
more detail below), and the charge itself is non-bypassable to customers of
the utility regardless of such customers' source of electric power.
o The right to collect the RRB Charge is established as a separate property
right (the "RRB Property") that includes all right, title, and interest in
and to all revenues, collections, claims, payments, money, or proceeds of or
arising from the RRB Charge.
o The RRB Property may be transferred by the electric utility to an SPE in a
transaction that is treated as a true sale for bankruptcy purposes. As
such, if the electric utility were to become the subject of a bankruptcy
proceeding, the RRB Property would not be part of the electric utility's
bankruptcy estate and therefore would not be subject to the claims of the
electric utility's creditors.
o The electric utility is authorized to cause the issuance and sale of RRBs.
The RRB Property is the principal asset underlying the RRBs.
o Any Financing Order issued must include a procedure for the periodic
adjustment of RRB Charges. This true-up mechanism serves to reconcile the
actual RRB Charges collected against the RRB Charges expected to have been
collected. This true-up mechanism, however, does not involve any recourse
to the electric utility.
o The state pledges and agrees that neither it nor any agency thereof will
alter, amend, reduce or impair the Transition Charge, the RRB Charge, the
RRB Property or the Financing Order and all rights thereunder, until RRBs
and any interest, fees and expenses associated therewith are fully
discharged, unless adequate provision is made for the protection of the
owners of the RRB Property and holders of RRBs.
C. The Structure of the Proposed Transactions
8. In accordance with the legislative requirements described above, the
Utilities each intend to use securitization as a means of recovering a portion
of the stranded costs incurred as a result of electric industry restructuring
in Connecticut, Massachusetts, and New Hampshire. In connection therewith, the
Utilities have each applied for a Financing Order from the appropriate state
public utilities commission.(6) The structure of the transactions for each
Utility will be substantially similar and will generally follow one of two
formats. The first format (the "One Security Format") is set forth below.
Because of the similarities to the One Security Format, the alternative format
(the "Two Securities Format") will be described below, but only to the extent
that it differs from the One Security Format.
(6) CL&P filed its application for a Financing Order with the Connecticut
Department of Public Utility Control (the "CDPUC") on May 31, 2000. The CDPUC
issued a Financing Order on November 8, 2000 and supplemented such Financing
Order on December 12, 2000. A copy of CL&P's application is attached hereto as
Exhibit D 1.1, a copy of the CDPUC's Financing Order is attached hereto as
Exhibit D 1.2, and a copy of such supplement is attached hereto as Exhibit
D 1.3. WMECO filed its petition for a Financing Order with the Massachusetts
Department of Telecommunications and Energy (the "MDTE") on April 18, 2000.
A copy of WMECO's petition is attached hereto as Exhibit D 2.1. WMECO has not
yet received a Financing Order from the MDTE. As part of the Settlement
Agreement proceedings before the NHPUC, see supra note 1, PSNH petitioned the
NHPUC for a Financing Order, and the NHPUC issued a Financing Order on
September 8, 2000. Copies of the Settlement Agreement, which was filed with
the NHPUC on August 2, 1999, and of the Conformed Settlement Agreement and
PSNH's Motion to the NHPUC for Findings of Fact and for Issuance of Finance
Order, each of which was filed with the NHPUC on June 23, 2000, are attached
hereto as Exhibits D 3.1, D 3.1.1, and D 3.1.2, respectively. A copy of the
NHPUC's Financing Order is attached hereto as Exhibit D 3.2.2.
(i) The One Security Format
(a) Formation and Capitalization of the SPE
9. The Utility will cause the organization of one or more bankruptcy remote,
wholly-owned SPEs, each of which is expected to be a Delaware limited liability
company authorized to acquire RRB Property and to issue RRBs.(7) The utility
will contribute as equity to the SPE cash equal to at least 0.50% of the
initial principal balance of RRBs issued with respect to such SPE (the "Capital
Amount"). This capitalization is required in order that the Utility may treat
the RRB issuance by the SPE as debt for tax purposes. The SPE will invest the
equity in financial instruments that are issued by parties unaffiliated with
the Utility and that can be readily converted to cash. Investment earnings on
the Capital Amount, to the extent not used to satisfy the RRBs, will be paid to
the Utility periodically. The Capital Amount and any investment earnings
thereon, to the extent not used to satisfy the RRBs, will be returned to the
Utility after the RRBs are paid in full.
(7) Each Utility must obtain approval from the appropriate state public
utilities commission prior to consummating the proposed transactions. See
supra note 6 and accompanying text. However, organization, alone, of one or
more SPEs does not require prior state approval
10. It is anticipated that the SPE will enter into an administration agreement
(the "Administration Agreement") with the Utility, pursuant to which the
Utility shall perform administrative services and provide facilities for
the SPE to ensure that it is able to perform such day-to-day operations as are
necessary to maintain its existence and perform its obligations under the
securitization transaction documents. Under the Administration Agreement, the
Utility will be entitled to receive an administration fee for its provision of
such services and facilities. In order to support the SPE's status as a
bankruptcy remote entity, separate and apart from the Utility, and to satisfy
related rating agency and legal opinion requirements, the administration fee
must be comparable to one negotiated in a market-based, arm's-length
transaction - i.e., reasonable and sufficient for a similar, unaffiliated
entity providing such services and facilities. Although this fee is expected
to approximate each Utility's estimate of the actual cost of providing these
services and facilities,(8) the Utilities cannot be certain that this fee will
meet the "at cost" requirements of Section 13(b) of the Act and Rules 90 and
91 thereunder.(9) Accordingly, the Utilities request an exemption from these
requirements.
(8) The annual administration fee applicable to each Utility's proposed
RRB transaction shall not exceed $75,000.
(9) Generally, Rule 91 requires "a fair and equitable allocation of
expenses" and allows "reasonable compensation for necessary capital procured."
(b) Sale of RRB Property
11. The Utility will sell the RRB Property to an SPE for an amount equal to
the issue price of the RRBs less any transaction costs paid by the SPE from
the proceeds of the RRBs. As provided for in the Securitization Acts, it is
expected that the transfer will constitute a true sale for bankruptcy and
commercial law purposes. Although the Utility will collect the billed RRB
Charge as servicer for the RRBs,(10) for legal purposes, the RRB Property will
remain isolated from the Utility's revenues and assets. Isolating the RRB
Property in this manner is intended to improve the likelihood that the RRBs
will receive the highest possible credit rating.
(10) See paragraph 18 below.
(c) Issuance of RRBs
12. Pursuant to the Securitization Acts, the SPE will issue RRBs, which in
turn will be sold to investors. The following principal amount of RRBs will
be issued on behalf of each Utility on or before August 31, 2005:
CL&P not to exceed $1.489 billion
WMECO not to exceed $303 million
PSNH not to exceed $670 million
As set forth in paragraph 47 below, the Utilities respectfully request the
Commission's approval to consummate, on or prior to August 31, 2005, all
transactions described in this Application. The "not to exceed" principal
amount set forth above for PSNH is the "not to exceed" principal amount
approved in the Financing Order issued by the NHPUC. See supra note 6
and Exhibit D 3.2.2 attached hereto. The "not to exceed" principal amounts
set forth above for CL&P and WMECO are consistent with the authorizations
sought by CL&P and WMECO in the Use of Proceeds Filing and granted by the
Commission in the Use of Proceeds Order. See supra note 6. The Financing
Order issued by the CDPUC authorizes CL&P to cause the issuance of RRBs in
a principal amount not to exceed $1.551 billion, which is greater than the
authorization granted by the Commission in the Use of Proceeds Order.
See Exhibit D 1.2 attached hereto. CL&P intends to seek additional
authorization from the Commission to cause the issuance of an additional
principal amount representing this excess. Accordingly, the Utilities hereby
respectfully request the issuance of an order by the Commission approving the
proposed transactions in the amounts set forth above for CL&P and PSNH and
reserving jurisdiction over the proposed transaction for WMECO.
13. The RRBs will be in the form of promissory notes of the SPE. The RRBs will
be nonrecourse to the Utility but will be secured by the assets of the SPE,
including (i) the RRB Property (including by a statutory lien on the RRB
Property as provided by the Securitization Acts), (ii) the accounts maintained
by the SPE for payments on the RRBs (together the "Collection Account"), (iii)
all amounts or investment property on deposit in or credited to the Collection
Account from time to time, (iv) all other property of whatever kind (other than
certain amounts owing to certain service providers) owned from time to time by
the SPE, and (v) all rights of the SPE in and to the transaction documents,
such as (a) the purchase agreement by which the SPE acquires the RRB Property
and (b) the servicing agreement (the "Servicing Agreement") by which the
Utility or any successor thereto acts as servicer (the "Servicer") for the RRB
Property.(11) The RRBs will not be subordinated to the claims of any creditors
or the equity owner of the SPE, other than for payments of trustee, servicing,
and administrative fees.
(11) See paragraph 18 below.
14. The RRBs will be issued in one or more series. Each series of RRBs may be
offered in one or more classes, each expected to have a different principal
amount, term, interest rate, and amortization schedule. Each Utility expects
that the weighted average all-in cost of the RRBs issued on its behalf will not
exceed the applicable U.S. Treasury bond benchmark security plus 300 basis
points. The Utilities also expect that the RRBs will have legal maturities not
longer than 15 years and that the longest-term RRBs will have scheduled
maturities that are at least 6 months earlier, as necessary to meet the rating
agencies' triple-A rating standards.(12) Other terms and characteristics of
the RRBs will be determined at the time of issuance based on then-current
market conditions. The SPE may enter into swap agreements or other hedging
arrangements solely to permit the issuance of variable rate RRBs. The cost of
any such agreements or arrangements will be included in the weighted average
all-in cost calculation referred to above.
(12) Legal maturity is the date on which nonpayment constitutes a default.
Scheduled maturity is the date on which the final principal payment is expected
to be made.
The Utilities expect the Financing Orders to include guidance with
respect to RRB maturities. The Securitization Acts also include such guidance.
See Conn. Gen. Stat. Section 16-245j(c)(6); M.G.L. c. 164,
Section 1H(b)(4)(vi); RSA 369-B:5, VIII.
15. The SPE will transfer to the Utility, as consideration for the transfer of
the RRB Property to the SPE, the proceeds from the issuance of the RRBs, net of
its transaction expenses. Under the restructuring statutes, the proceeds from
the issuances of RRBs are required to be used to reduce customer costs by
reducing capitalization and, hence, the Utilities' revenue requirements. In
order to achieve these cost savings, the Utilities must reduce their debt,
preferred and common equity capitalizations to reflect the fact that they are
smaller corporate entities. The proceeds of restructuring transactions
(including the RRB transactions) are expected to provide the Utilities with
the funds to achieve this capitalization reduction.(13)
(13) See paragraph 2 above and the Use of Proceeds Filing.
16. The Utilities will apply the net proceeds of the restructuring transactions
(including the RRB transactions), among other things, to retire outstanding
debt and preferred stock, to buy down existing power purchase agreements with
independent power producers and to reduce their capitalizations. The buy-down
of power purchase contracts and the retirement of debt and preferred stock can
be accomplished without Commission authorization. In order to effectively
reduce their capitalizations, the Utilities previously sought Commission
authorization to use all or a portion of the proceeds from the restructuring
transactions (including the RRB transactions) 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 the receipt of restructuring proceeds
(including RRB proceeds) does not result in net income giving rise to earned
surplus to the Utilities, the Act and the regulations thereunder require
Commission authorization 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 authorization is required
for the repurchase by the Utilities of their stock from NU, an affiliate of
the Utilities. As previously indicated, the Commission granted the
authorizations described in this paragraph 16 in the Use of Proceeds Order.(14)
(14) See paragraph 2 above, the Use of Proceeds Filing and the Use of
Proceeds Order.
17. The addition of securitization debt to the balance sheets of the Utilities
on a pro forma (15) basis will cause each Utility (and NU on a consolidated
basis) to fall below the Commission's benchmark 30% common equity-to-total
capitalization ratio. However, the ratings of the respective senior debt
securities of each Utility will be unaffected or will be improved by the
issuance of the RRBs, which are not considered obligations of the Utilities by
the ratings agencies. The Utilities presently anticipate that all such debt
will have been amortized by no later than twelve years after the respective
date when the maximum principal amount of RRBs has been issued on such
Utility's behalf. Thus, each Utility's common equity ratio will exceed 30% by
no later than the end of such twelve-year period. In all likelihood, a
sufficient amount of securitization debt will be amortized prior to the end of
such twelve-year period to restore each Utility's common equity ratio to over
30% prior to that date, but at this point the terms of such debt are not known
so an earlier date cannot be reliably predicted.(16)
(15) The SPE and the holders of the RRBs will expressly agree under the
terms of the applicable transaction documents to treat the RRBs as debt of the
SPE for all purposes. However, for each Utility's financial reporting
purposes, the RRBs will be treated as debt of such Utility.
(16) As described in the Use of Proceeds Filing, and subject to the
assumptions set forth therein, (i) the common equity ratio will reach 30% in
the ninth year in the case of CL&P and in the tenth year in the case of WMECO
and PSNH and (ii) each Utility's common equity ratio will be over 30% by the
end of the twelfth year. See Use of Proceeds Filing.
(d) Servicing the RRBs
18. Through the transfer of the RRB Property to the SPE, the SPE will obtain
the right and the obligation to assess and collect the RRB Charge. On behalf of
the SPE, the Utility will act initially as the Servicer for the RRB Property
and will be responsible for calculating, billing, collecting, and remitting the
RRB Charge from all present and future customers that are obligated to pay such
charge. Therefore, the Utility will carry out billing and collection
activities both as Servicer with respect to the RRB Charge and as principal
with respect to its own charges to be paid by such customers. The Utility can
be replaced as Servicer only if it fails to perform its obligation under the
Servicing Agreement satisfactorily, and it can resign only in limited
circumstances.
19. As Servicer, the Utility will bill and collect the RRB Charge and retain
all books and records regarding the RRB Charge, subject to the right of the
SPE to inspect those records. The Utility, or any successor Servicer, will
periodically remit (as frequently as required by the rating agencies and in all
events within one calendar month of collection) the billed and collected RRB
Charge to the trustee appointed under an indenture in connection with the
issuance of the RRBs (the "RRB Trustee"). To the extent that estimation of
such collections is required, the Utility will design a methodology that will
be satisfactory to the rating agencies, and that will approximate most closely
actual collections. The monies deposited with the RRB Trustee will be held
in the Collection Account.
20. As initial Servicer, the Utility will be entitled to receive a servicing
fee for its servicing activities and reimbursement for certain of its expenses
in the manner set forth in the Servicing Agreement. In order to support the
SPE's status as a bankruptcy remote entity, separate and apart from the
Utility, and to satisfy related rating agency and legal opinion requirements,
the servicing fee must be comparable to one negotiated in a market-based,
arm's-length transaction - i.e., reasonable and sufficient for a similar,
unaffiliated entity providing similar services. Although this fee is expected
to approximate each Utility's estimate of the actual cost of providing these
services,(17) the Utilities cannot be certain that this fee will meet the "at
cost" requirements of Section 13(b) of the Act and Rules 90 and 91
thereunder.(18) Accordingly, the Utilities request an exemption from these
requirements. See Central and South West Corporation, HCAR No. 27168
(April 20, 2000).
(17) The annual servicing fee applicable to CL&P's and WMECO's proposed
RRB transactions shall equal approximately 0.05% of the initial principal
balance of RRBs. The annual servicing fee applicable to PSNH's proposed RRB
transaction shall equal approximately 0.25% of the outstanding principal
balance of RRBs.
The servicing fee paid to the Utility will be lower than the
servicing fee paid to a successor Servicer that does not concurrently bill the
RRB Charge with charges for other services due to the fact that the successor
Servicer would not otherwise be sending bills to and making collections from
customers, and therefore the cost to that successor Servicer associated with
servicing the RRB Charge and the RRBs is higher.
(18) See supra note 9.
21. The RRB Charge will be established at a level (or at different levels
during specified periods over the life of RRBs) intended to (i) provide for
the full recovery of payments of interest and principal on RRBs, in accordance
with the expected amortization schedule determined at the time of offering,
(ii) provide credit enhancement, including any liquidity reserves and an
amount for overcollateralization (the "Overcollateralization Amount"),
and (iii) provide for any related fees, costs and expenses - based upon
assumptions including sales forecasts, charge-offs, and lags between RRB
Charge billing and collection by the Servicer.
22. The Overcollateralization Amount will eventually reach at least 0.50% of
the initial principal amount of the RRBs, and will be collected ratably over
the expected term of the RRBs. The Utility has been advised that the
Overcollateralization Amount is necessary for the RRBs to receive the highest
possible credit rating.
23. As a result of the Overcollateralization Amount, the Utility expects to
receive RRB Charge collections in excess of the total amount that will be paid
on the RRBs plus the fees and expenses that will be paid by the SPE.
After the date of the final payment of principal and interest on the RRBs,
this excess will be applied as a credit to the Transition Charge or the
Utility's other rates and charges that would otherwise be charged to the
Utility's customers.
24. The level of the RRB Charge may differ during the term of the RRBs due
to several factors, including changes in the principal balance of the RRBs,
changes in the weighted average interest rate of RRBs as the relative
principal balance outstanding changes, the impact of the variability of energy
sales and customer movements in and out of the service territory, and changes
in ongoing fees, costs, and expenses of the RRBs. In addition, the amount of
the RRB Charge remitted relative to the amount billed will likely vary due to
several factors, including changes in customer payment and charge-off patterns.
(e) Credit Enhancement
25. In order to minimize the impact of variability in the remittance of the RRB
Charge on the payment of principal, interest, fees, costs and expenses on RRBs,
the Financing Order is expected to provide for the RRB Charge to be adjusted by
a true-up mechanism at least annually to keep actual principal amortization in
line with the expected amortization schedule. By means of this true-up
mechanism, on at least an annual basis, the Utility, as Servicer (or any
successor Servicer) on behalf of the SPE, will file the revised RRB Charge with
the public utilities commission, which will become effective shortly
thereafter.
26. Upon issuance of the initial series of RRBs, the SPE will establish the
Collection Account, which will consist of at least four subaccounts: a general
subaccount (the "General Subaccount"), a reserve subaccount (the "Reserve
Subaccount"), a subaccount for the Overcollateralization Amount (the
"Overcollateralization Subaccount"), and a subaccount for the Capital Amount
(the "Capital Subaccount"). Additional subaccounts may be established in
respect of additional credit enhancements or as necessitated for convenience
by the transaction documents. These accounts will be maintained and
administered in trust by the RRB Trustee.
27. The billed and collected RRB Charge will be remitted to the Collection
Account. Amounts in the Collection Account will be used to pay the fees of
the RRB Trustee, fees to the Servicer, administrative costs, operating expenses
of the SPE, accrued but unpaid interest on all classes of the RRBs, and
principal (to the extent scheduled) on the outstanding RRBs. Any remaining
billed and collected RRB Charge will be allocated to the Capital Subaccount
(to the extent that the Capital Subaccount is below the required capital
level), the Overcollateralization Subaccount (to the extent scheduled), and
then to the Reserve Subaccount.
28. If the billed and collected RRB Charge in any period is insufficient to
satisfy the SPE's payment obligations on the RRBs, then amounts in the Reserve
Subaccount, the accumulated Overcollateralization Amount, and Capital Amount
will be used (in that order) to satisfy scheduled principal and interest
payments. To the extent that the Overcollateralization Amount or the Capital
Amount is used to satisfy principal and interest payments on the RRBs, the RRB
Charge will be adjusted in the future to restore those amounts.
29. Investment earnings on amounts in the Collection Account also may be used
to satisfy scheduled interest and principal payments on RRBs and to restore
the Capital Amount and the scheduled Overcollateralization Amount. Except for
earnings on the Capital Subaccount, any excess earnings will be remitted to the
SPE and, after the last scheduled date for the payment of accrued interest and
principal on the bonds, will be distributed to the Utility for the benefit of
its customers. As indicated above, investment earnings on amounts in the
Capital Subaccount, to the extent not used to satisfy the RRBs, will be paid to
the Utility periodically. As also indicated above, amounts in the Capital
Subaccount and any investment earnings thereon, to the extent not used
to satisfy the RRBs, will be returned to the Utility after the RRBs are paid
in full.
30. Other forms of credit enhancement customary for securitization transactions
also might be used, such as a liquidity reserve, debt service reserve fund,
bank letter of credit, or surety bond or similar insurance policy. If
determined to be cost-effective, these forms of credit enhancement will be
implemented at the time of bond pricing and the related cost will be recovered
through the RRB Charge. The cost of any such credit enhancement will be
included in the weighted average all-in cost calculation referred to in
paragraph 14 above.
(f) Defaults
31. The RRBs will provide for the following events of default: (i) a default
in the payment of accrued interest on any class of RRBs (after a specified
grace period); (ii) a default in the payment of outstanding principal as of the
legal maturity date; (iii) a default in payment of the redemption price
following a call as of the redemption date; (iv) certain breaches of covenants,
representations or warranties by the SPE in the indenture under which the RRBs
are issued; and (v) certain events of bankruptcy, insolvency, receivership or
liquidation of the SPE.
32. In the event of a payment default on the RRBs, the RRB Trustee or holders
of a majority in principal amount of all series then outstanding may declare
the principal of all classes of the RRBs to be immediately due and payable. If
all classes of the RRBs have been declared to be due and payable following an
event of default, the RRB Trustee may, in its discretion, either sell the RRB
Property or allow the SPE to maintain possession of the RRB Property and
continue to apply receipts of the RRB Charge as if there had been no
declaration of acceleration.
(ii) Two Securities Format
33. The alternative format that one or more of the Utilities might follow with
respect to the proposed transactions is the same as the One Security Format in
all material respects, except as described in this paragraph 33 and in
paragraphs 34, 35, and 36 below. Under the Two Securities Format, instead of
issuing RRBs to investors, the SPE will issue promissory notes (the "SPE Debt
Securities") to a governmentally-sponsored trust established by one or
more agencies of the state in which the Utility operates (the "Trust"). Under
the Two Securities Format, the SPE Debt Securities will be secured by the RRB
Property and all of the other assets of the SPE - i.e., in the same manner
that the RRBs would be secured under the One Security Format. Overall, the
characteristics of the SPE Debt Securities under the Two Securities Format will
be the same as those described for the RRBs under the One Security Format.
34. Under the Two Securities Format, the Trust will issue RRBs in aggregate
principal amount equal to the aggregate principal amount of the SPE Debt
Securities. The RRBs in turn will be sold to investors.
35. The RRBs will be in the form of pass-through certificates representing
beneficial ownership interests in the SPE Debt Securities held by the Trust,
and therefore effectively will be secured by the RRB Property and all of
the other assets of the SPE. Each class of each series of RRBs will represent
fractional undivided beneficial interests in a class of a series of SPE Debt
Securities held by the Trust and the proceeds thereof and will have terms
and characteristics that are substantially identical to the corresponding class
of SPE Debt Securities. The RRBs will be secured by a statutory lien on the
RRB Property as provided by the Securitization Acts. Under the Two Securities
Format, the SPE or the Trust may enter into swap agreements or other hedging
arrangements solely to permit the issuance of variable rate RRBs. In such
case, the RRBs would also represent beneficial ownership interests in those
agreements or arrangements. The cost of any such agreements or arrangements
will be included in the weighted average all-in cost calculation referred to
in paragraph 14 above.
36. Under the Two Securities format, the Trust will transfer the proceeds from
the issuance of the RRBs, net of its transaction expenses, if any, to the SPE,
as consideration for the SPE Debt Securities. The SPE will then transfer to
the Utility, as consideration for the transfer of the RRB Property to the SPE,
the balance of such RRB proceeds, net of any remaining transaction expenses.
D. Statement Pursuant to Rule 54
37. Except in accordance with the Act, neither NU nor any subsidiary thereof
(a) has 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 or will as a consequence of the transactions proposed
herein have a right under, a service, sales, or construction contract with an
EWG or a FUCO. None of the proceeds from the transactions proposed herein will
be used by NU and its subsidiaries to acquire any securities of, or any
interest in, an EWG or a FUCO.
38. NU currently meets all of the conditions of Rule 53(a), except for clause
(1). At September 30, 2000, NU's "aggregate investment," as defined in Rule
53(a)(1), in EWGs and FUCOs was approximately $469.5 million, or approximately
74 % of NU's average "consolidated retained earnings," also as defined in Rule
53(a)(1), for the four quarters ended September 30, 2000 ($638.8 million).
With respect to Rule 53(a)(1), however, the Commission has determined that
NU's financing of its investment in Northeast Generation Company ("NGC"), NU's
only current EWG or FUCO, in an amount not to exceed $481 million or 83% of its
"average consolidated retained earnings" would not have either of the adverse
effects set forth in Rule 53(c). See Northeast Utilities, HCAR No. 27148
(March 7, 2000) (the "Rule 53(c) Order"). NU continues to assert that its EWG
investment in NGC will not adversely affect the System. NU continues to assert
that its EWG investment in NGC will not adversely affect the NU system.
39. In addition, NU and its subsidiaries are in compliance with the other
provisions of Rule 53(a) and (b), as demonstrated by the following
determinations:
(i) NGC maintains books and records, and prepares financial statements in
accordance with Rule 53(a)(2). Furthermore, NU has undertaken to
provide the Commission access to such books and records and financial
statements, as it may request.
(ii) No employees of NU's public utility subsidiaries have rendered
services to NGC.
(iii) 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 the Form U5S and Exhibits G and H thereof to each state
regulator having jurisdiction over the retail rates of NU's public
utility subsidiaries.
(iv) Neither NU nor any subsidiary has been the subject of a bankruptcy or
similar proceeding unless a plan of reorganization has been confirmed
in such proceeding.
(v) NU's average consolidated retained earnings for the four most recent
quarterly periods have not decreased by 10% or more from the average
for the previous four quarterly periods.
(vi) In the previous fiscal year, NU did not report operating losses
attributable to its investment in EWGs/FUCOs exceeding 3 percent
of NU's consolidated retained earnings.
40. The proposed transactions, considered in conjunction with the effect of the
capitalization and earnings of NU's EWGs and FUCOs, would not have a material
adverse effect on the financial integrity of the NU system, or an adverse
impact on NU's public-utility subsidiaries, their customers, or the ability of
state commissions to protect such public-utility customers.
41. The Rule 53(c) Order was predicated, in part, upon an assessment of NU's
overall financial condition which took into account, among other factors,
NU's consolidated capitalization ratio and its retained earnings, both of which
have improved since the date of the order. As of June 30, 2000, the end of
the first quarter after the issuance of the Rule 53(c) Order, the consolidated
capitalization ratios of NU, with consolidated debt including all short-term
debt and non-recourse debt of the EWG was as follows:
As of June 30, 2000 %
------------------- ---
(thousands of dollars)
Common shareholders' equity 2,365,854 36.9
Preferred stock 277,700 4.3
Long-term and short-term debt 3,768,353 58.8
--------- -----
6,411,907 100.0
========= =====
42. The consolidated capitalization ratios of NU as of September 30, 2000,
with consolidated debt including all short-term debt and non-recourse debt of
the EWG was as follows:
As of September 30, 2000 %
------------------------ ---
(thousands of dollars)
Common shareholders' equity 2,413,785 37.9
Preferred stock 277,700 4.3
Long-term and short-term debt 3,683,667 57.8
--------- -----
6,375,152 100.0
========= =====
43. NU's consolidated retained earnings have increased from $582 million
as of December 31, 1999 to $691 million as of September 30, 2000. NU's
interest in NGC (its only EWG or FUCO) has made a positive contribution
to earnings in that time by contributing $15 million to NU's retained earnings
with revenues of $75.5 million and net income of $15.7 million. Accordingly,
since the date of the Rule 53(c) Order, the capitalization and earnings
attributable to NU's investments in EWGs and FUCOs has not had an adverse
impact on NU's financial integrity.
II. FEES, COMMISSIONS AND EXPENSES
44. 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 Utilities are expected to be comprised primarily of fees for
ordinary legal, accounting and investment banking services and are not expected
to exceed the following amounts, assuming the RRBs are fully issued:
CL&P not to exceed $13 million
PSNH not to exceed $9 million
WMECO not to exceed $6 million
III. APPLICABLE STATUTORY PROVISIONS
45. Sections 6(a), 7, 9(a), 10, 12(f), 12(g) and 13(b) of the Act and Rules 90
and 91 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 transactions, the Utilities request appropriate orders
thereunder. As noted above, the use of proceeds from various restructuring
transactions, including the issuance of the RRBs, was the subject of the
Use of Proceeds Filing and the Use of Proceeds Order.
IV. REGULATORY APPROVALS
46. WMECO is seeking approval for its proposed transaction from the MDTE, and
CL&P and PSNH have obtained approval for their proposed transactions from the
CDPUC and the NHPUC, respectively. PSNH also has obtained approval for its
proposed transaction from the Maine Public Utilities Commission (the "MPUC").
The orders from the CDPUC, the NHPUC and the MPUC do not contain any conditions
limiting the ability of CL&P or PSNH to consummate their proposed transactions
in the manner described in this Application. Accordingly, the Utilities hereby
respectfully request the issuance of an order by the Commission approving the
proposed transactions for CL&P and PSNH and reserving jurisdiction over the
proposed transaction for WMECO.
V. PROCEDURE
47. The Utilities hereby request that the Commission publish a notice under
Rule 23 with respect to the filing of this Application as soon as practicable
and that the Commission's order be issued as soon as possible. An amended and
restated form of notice suitable for publication in the Federal Register is
attached hereto as Exhibit H 1. The Utilities respectfully request the
Commission's approval to consummate, on or prior to August 31, 2005, all
transactions described in this Application, whether under the sections of the
Act and Rules thereunder enumerated in paragraph 45 above or otherwise. It is
further requested that the Commission issue a single order authorizing the
transactions proposed herein at the earliest practicable date but in any event
not later than December 21, 2000. Additionally, the Utilities (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.
VI. EXHIBITS AND FINANCIAL STATEMENTS
48. Exhibits. Each Utility undertakes to file all material financing documents
relating to its RRB transaction with the certificate filed pursuant to Rule 24
under the Act after the consummation of such transaction. The following
exhibits are filed with this Application (asterisked (*) items were filed with
the original Application; double asterisked (**) items were filed with
Amendment No. 1 to this Application; triple asterisked (***) items were filed
with Amendment No. 2 to this Application; quadruple asterisked items (****)
were filed with Amendment No. 3; and quintuple asterisked items (*****) were
filed with Amendment No. 4).
C 1 Registration Statement on Form S-3 for the CL&P RRBs (to be
filed by further amendment)
C 2 Registration Statement on Form S-3 for the WMECO RRBs (to be
filed by further amendment)
C 3 Registration Statement on Form S-3 for the PSNH RRBs (to be
filed by further amendment)
*D 1.1 Application of CL&P to the Connecticut Department of Public
Utility Control for Approval of the Issuance of Rate Reduction
Bonds and Related Transactions
*****D 1.2 Financing Order of the Connecticut Department of Public
Utility Control
*D 2.1 Petition of WMECO to the Massachusetts Department of
Telecommunications and Energy for Approval of the Issuance
of Electric Rate Reduction Bonds
D 2.2 Financing Order of the Massachusetts Department of
Telecommunications and Energy (to be filed by further
amendment)
*D 3.1 PSNH's Settlement Agreement (Exhibit 10.2, NU Form 10-Q for
the Quarter ended June 30, 1999, File No. 1-5324)
***D 3.1.1 PSNH's Conformed Settlement Agreement
***D 3.1.2 PSNH's Motion to the New Hampshire Public Utilities Commission
for Findings of Fact and for Issuance of Finance Order
*D 3.2.1 PSNH's Settlement Order
****D 3.2.2 Finance Order of the New Hampshire Public Utilities Commission
****D 3.2.3 Order of the New Hampshire Public Utilities Commission
Addressing the Conformed Settlement Agreement
****D 3.3.1 Application of PSNH to the Maine Public Utilities Commission
for the Approval of Reorganization
****D 3.3.2 Maine Public Utilities Commission Approval of Reorganization
***F Opinion of Counsel
**G Financial Data Schedules
*H Proposed Form of Notice
***H 1 Amended and Restated Proposed Form of Notice
49. Financial Statements. The following financial statements are filed with
this Application (double asterisked (**) items were filed with Amendment No. 1
to this Application).
**1. Northeast Utilities (consolidated)
**1.1 Balance Sheet, per books and pro forma, as of March 31, 2000.
**1.2 Statement of Income, per books and pro forma, for 12 months
ended March 31, 2000 and capital structure, per books and pro
forma, as of March 31, 2000.
**2. Northeast Utilities (parent company only)
**2.1 Balance Sheet, per books and pro forma, as of March 31, 2000.
**2.2 Statement of Income, per books and pro forma, for 12 months
ended March 31, 2000 and capital structure, per books and pro
forma, as of March 31, 2000.
**3. The Connecticut Light and Power Company
**3.1 Balance Sheet, per books and pro forma, as of March 31, 2000.
**3.2 Statement of Income, per books and pro forma, for 12 months
ended March 31, 2000 and capital structure, per books and pro
forma, as of March 31, 2000.
**4. Western Massachusetts Electric Company
**4.1 Balance Sheet, per books and pro forma, as of March 31, 2000.
**4.2 Statement of Income, per books and pro forma, for 12 months
ended March 31, 2000 and capital structure, per books and pro
forma, as of March 31, 2000.
**5. Public Service Company of New Hampshire
**5.1 Balance Sheet, per books and pro forma, as of March 31, 2000.
**5.2 Statement of Income, per books and pro forma, for 12 months
ended March 31, 2000 and capital structure, per books and pro
forma, as of March 31, 2000.
VII. INFORMATION AS TO ENVIRONMENTAL EFFECTS
50. (a) The financial transactions described herein do not involve a major
Federal action significantly affecting the quality of the environment.
(b) No other federal agency has prepared or is preparing an environmental
impact statement with regard to the proposed transaction.
SIGNATURES
----------
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, as amended, the undersigned companies have duly caused this statement to
be signed on their behalf by the undersigned thereunto duly authorized.
THE CONNECTICUT LIGHT AND POWER COMPANY
By: /s/ Randy A. Shoop
---------------------------------
Randy A. Shoop
Treasurer
WESTERN MASSACHUSETTS ELECTRIC COMPANY
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
By: /s/ Randy A. Shoop
---------------------------------
Randy A. Shoop
Assistant Treasurer - Finance
Date: December 21, 2000
