(Release No. 35-27659; 70-10051)
Order Authorizing Long-Term Debt Issuances and Hedging Transactions
Northeast Utilities ("NU"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended, ("Act"), Berlin, Connecticut , has filed a declaration ("Declaration") with the Securities and Exchange Commission ("Commission") under sections 6(a) and 7 of the Act and rule 54 under the Act. The Commission issued a notice of the Declaration on January 31, 2003 (HCAR No. 35-27643).
NU requests authority through the period ending June 30, 2005 ("Authorization Period") to: (i) issue from time to time unsecured long-term debt securities ("Long-term Debt") in an aggregate amount at any time outstanding not to exceed $600 million, and (ii) enter into hedging transactions ("Interest Rate Hedges") with respect to existing indebtedness of NU and its nonutility subsidiaries1 ("Nonutility Subsidiaries") in order to manage and minimize interest rate costs and enter into hedging transactions with respect to future expected debt issuances ("Anticipatory Hedges") in order to lock in then current interest rates and/or manage interest rate risk exposure.
I. Long-term Debt
NU requests authorization to issue Long-term Debt, the proceeds of which will enable NU to reduce or refinance short-term debt with more permanent capital and provide a source of future financing for the operations of and investments in Nonutility Subsidiaries that are exempt under the Act and its regulated businesses. Long-term Debt of NU may be in the form of unsecured notes ("Debentures") issued in one or more series. The Debentures of any series will: (i) have a maturity ranging from one to 50 years, (ii) bear interest at a rate not to exceed 500 basis points over the yield to maturity of a U.S. Treasury security having a remaining term approximately equal to the term of the series of Debentures, (iii) be subject to optional and/or mandatory redemption, in whole or in part, at par or at various premiums above or discounts below the principal amount, (iv) be entitled to mandatory or optional sinking fund provisions, and (v) may provide for reset of the coupon according to a remarketing arrangement. Long-term Debt of NU also may be in the form of unsecured bank lines of credit ("Bank Lines"). Bank Lines will have maturities of not more than five years from the date of each borrowing and the effective cost of these loans will not exceed at the time of issuance 500 basis points over LIBOR. The maturity dates, interest rates, call, redemption and sinking fund provisions and conversion features, if any, with respect to the Debentures of a particular series, as well as any associated placement, underwriting or selling agent fees, commissions and discounts, if any, will be established by negotiation or competitive bidding and reflected in the applicable supplemental indenture or officer's certificate and purchase agreement or underwriting agreement setting forth the terms.
NU commits that, apart from the securities issued for the purpose of funding money pool operations, no Long-term Debt may be issued in reliance upon this order during the Authorization Period, unless: (i) the security to be issued, if rated, is rated investment grade; and (ii) all outstanding securities of NU that are rated are rated investment grade. For purposes of this condition, a security will be considered investment grade if it is so rated by at least one nationally recognized statistical rating organization as the term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of rule 15c3-1 under the 1934 Securities and Exchange Act. NU requests that the Commission reserve jurisdiction over the issuance by NU of any Long-term Debt that is rated below investment grade.
NU contemplates that the Debentures would be issued and sold directly to one or more purchasers in privately negotiated transactions or to one or more investment banking or underwriting firms or other entities that would resell the Debentures without registration under the 1933 Act, in reliance upon one or more applicable exemptions from registration or to the public either (i) through underwriters selected by negotiation or competitive bidding or (ii) through selling agents acting either as agent or principal for resale to the public, either directly or through dealers.
NU requests authorization to enter into Interest Rate Hedges in connection with indebtedness of NU or its Nonutility Subsidiaries, subject to certain limitations and restrictions as proposed in the Declaration, in order to reduce or manage interest rate costs and risks and to generate parent-level cash and earnings. Interest Rate Hedges would generally be privately negotiated and only be entered into with counterparties ("Approved Counterparties") whose senior unsecured debt ratings, or the senior unsecured debt ratings of any guaranteeing parent companies of the counterparties, as published by Standard and Poor's Ratings Group, are equal to or greater than BBB, or an equivalent rating from Moody's Investors Service or Fitch IBCA. NU may also acquire Interest Rate Hedges through an on-exchange transaction. Interest Rate Hedges will involve the use of financial instruments commonly used in the capital markets, such as options, interest rate swaps, locks, caps, collars, floors, exchange-traded futures and options, and other similar appropriate instruments. The transactions would be for fixed periods and stated notional amounts as are generally accepted as prudent in the capital markets. In no case will the notional principal amount of any Interest Rate Hedge exceed that of the underlying debt instrument. NU will not engage in speculative transactions as that term is described in Statement of Financial Accounting Standard 133, as amended ("FAS 133"). Transaction fees, commissions and other amounts payable to brokers in connection with an Interest Rate Hedge will not exceed those generally obtainable in competitive markets for parties of comparable credit quality.
In addition, NU requests authorization to enter into Anticipatory Hedges in connection with anticipated debt offerings of NU and its Nonutility Subsidiaries, subject to certain limitations and restrictions set forth in the Declaration. Anticipatory Hedges would only be entered into with Approved Counterparties, and would be utilized to manage the interest rate risk associated with any new Long-term Debt issuance of its own or of its Nonutility Subsidiaries through (i) a sale of exchange-traded U.S. Treasury futures contracts, a forward sale of U.S. Treasury Securities and/or a swap for the sale of the value of U.S. Treasury securities (collectively, "Forward Sales"), (ii) the purchase of put options on U.S. Treasury Securities ("Put Options Purchase"), (iii) a Put Options Purchase in combination with the sale of call options on U.S. Treasury Securities (a "Zero Cost Collar"), (iv) transactions involving the purchase or sale, including short sales, of U.S. Treasury Securities, or (v) some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or other derivative or cash transactions, including, but not limited to options, locks, caps and collars, appropriate for the Anticipatory Hedges. Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades") through brokers by trading futures and/or options positions publicly traded or over-the-counter with one or more counterparties ("Off-Exchange Trades"), or a combination of On-Exchange Trades and Off-Exchange Trades. NU will determine the optimal structure of each Anticipatory Hedge transaction at the time of execution. NU may decide to lock in interest rates and/or limit its exposure to interest rate increases. NU represents that each Interest Rate Hedge and Anticipatory Hedge will qualify for hedge accounting treatment on a continuing basis under generally acceptable accounting practices. NU will also comply with the then existing financial disclosure requirements of the Financial Accounting Standards Board for hedging transactions, currently FAS 133.
III. Use of Proceeds
NU will use the proceeds from these financings for general corporate purposes, including (i) investments in its regulated utility companies,2 (ii) investments in Rule 58 Subsidiaries, ETCs and other competitive companies, the acquisition of which has been authorized by Commission order, (iii) the repayment, redemption, refunding or purchase by NU of its own securities, (iv) financing working capital requirements of NU and its subsidiaries, and (v) other corporate purposes.
IV. Current Financial Conditions
For the 12 months ending December 31, 2002, NU's gross revenues and net income were approximately $5.0 billion and $152 million, respectively. As of December 31, 2002, NU's consolidated capitalization consisted of 33.4% common equity, 1.8% preferred stock, 28.6% of Rate Reduction Bonds issued according to state law by the operating public utility companies, and 36.2% other debt. When the Rate Reduction Bonds are excluded, NU's consolidated capitalization consisted of 46.8% common equity, 2.4% preferred stock and 50.8% debt. NU's current credit ratings for its senior unsecured debt are: Moody's, Baa1; Standard & Poor's, BBB.
As of December 31, 2002, CL&P's consolidated capitalization consisted of 24.1% common equity, 4.0% preferred stock, 43.2% of Rate Reduction Bonds issued according to state law, and 28.7% of long-term and short-term debt. When the Rate Reduction Bonds are excluded CL&P's consolidated capitalization consisted of 42.4% common equity, 7.0% preferred stock, and 50.5% debt. The credit rating for senior debt of CL&P is BBB+ by Standard and Poor's and A3 by Moody's.
As of December 31, 2002, WMECO's consolidated capitalization consisted of 31.9% common equity, 28.8% of Rate Reduction Bonds issued pursuant to state law, and 39.3% of long-term and short-term debt. When the Rate Reduction Bonds are excluded, WMECO's consolidated capitalization consisted of 44.8% common equity and 55.2% debt. The credit rating for senior unsecured debt of WMECO is BBB+ by Standard and Poor's and A3 by Moody's.
As of December 31, 2002, PSNH's consolidated capitalization consisted of 26.0% common equity, 41.2% of Rate Reduction Bonds issued according to state law, and 32.8% of long-term and short-term debt. When the Rate Reduction Bonds are excluded, PSNH's consolidated capitalization consisted of 44% common equity and 56% debt. The credit rating for senior secured debt of PSNH is BBB+ by Standard and Poor's and A3 by Moody's.
NU currently meets all of the conditions of Rule 53(a), except for clause (1). At December 31, 2002, NU's "aggregate investment," as defined in Rule 53(a)(1), in EWGs and FUCOs was approximately $448.2 million, or approximately 59% of NU's average "consolidated retained earnings," also as defined in Rule 53(a)(1), for the four quarters ended December 31, 2002 ($713.1 million). With respect to Rule 53(a)(1), however, the Commission has by order dated March 7, 2000 (HCAR No. 27148)("Rule 53(c) Order") 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). NU and its subsidiaries are in compliance and will continue to comply with the other provisions of Rule 53(a) and (b).
The proposed transactions, considered in conjunction with the effect of the capitalization and earnings of NU's EWGs and FUCOs, will 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 NU's public-utility customers, NU states. The Rule 53(c) Order assessed NU's overall financial condition, taking 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. NU's EWG investment (it has no FUCO investment) has been profitable for all quarterly periods ending June 30, 2000, through December, 31, 2002 (NGC was acquired in March 2000). As of December 31, 1999, the most recent period for which financial statement information was evaluated for the Rule 53(c) Order, NU's consolidated capitalization consisted of 35.3% common equity and 64.7% debt (including long and short-term debt, preferred stock, capital leases and guarantees). 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, were as follows: common shareholders' equity $2,365,854,000 or 36.9%; preferred stock, $277,700,000 or 4.3%; long-term and short-term debt, $3,768,353,000 or 58.8%, for a total of $6,411,907,000. The consolidated capitalization ratios of NU as of December 31, 2002, with consolidated debt including all short-term debt and non-recourse debt of the EWG, were as follows: common shareholders' equity, $2,210,521,000 or 33.4%; preferred stock, $116,200,000, or 1.8%; long-term and short-term debt, $2,400,050,000, or 36.2%; Rate Reduction Bonds, $1,899,312,000, or 28.6% for a total of $6,626,312,000. If Rate Reduction Bonds are excluded the consolidated capitalization ratio of NU as of December 31, 2002, is: common shareholders equity, $2,210,521,000 or 46.8%; preferred stock, $116,200,000 or 2.4%; long-term and short-term debt, $2,400,050,000, or 50.8%.
NGC contributed $131.9 million in revenues in the 12-month period ending December 31, 2002, and net income of $30.4 million for the same period. Although since the date of the Rule 53(c) Order, the common equity ratio of NU on a consolidated basis has decreased, it still remains at a financially healthy level, above the 30% benchmark required by the Commission. Accordingly, NU's investment in its EWG has not had an adverse impact on NU's financial integrity.
The fees, commissions and expenses expected to be paid or incurred, directly or indirectly, in connection with the transactions proposed are estimated to be less than $25,000, including legal, financial, accounting and other services.
No state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.
Due notice of the filing of the Declaration has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that the Declaration, as amended, be permitted to become effective immediately, except as to those matters over which jurisdiction has been reserved and subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED that jurisdiction is reserved, pending completion of the record, over the issuance by NU of any Long-term Debt that is rated below investment grade.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
1 Nonutility Subsidiaries includes companies formed according to rule 58 of the Act ("Rule 58 Subsidiaries"), exempt wholesale generators "(EWGs") as defined in the Act, foreign utility companies ("FUCOs") as defined in the Act, exempt telecommunications companies ("ETCs") and other competitive direct or indirect subsidiaries of NU, the acquisition of which has been authorized by Commission orders.
2 NU's regulated utilities include The Connecticut Light and Power Company ("CL&P), Western Massachusetts Electric Company ("WMECO"), Public Service Company of New Hampshire ("PSNH"), Holyoke Water Power Company, and Yankee Gas Services Company.