(Release No. 35-27693; 70-9755)
Northeast Utilities, et al.
Order Authorizing Various Short-Term Debt Financings and Money Pool Transactions; Reserving Jurisdiction
June 30, 2003
Northeast Utilities ("NU"), West Springfield, MA, a registered holding company, Northeast Utilities Service Company ("NUSCO"), Berlin, CT, its wholly-owned service company subsidiary, and NU's wholly-owned public-utility subsidiaries, Western Massachusetts Electric Company ("WMECO"), West Springfield, MA, The Connecticut Light and Power Company ("CL&P"), Berlin, CT, Holyoke Water Power Company ("HWP"), Holyoke, MA, Public Service Company of New Hampshire ("PSNH") and North Atlantic Energy Corporation ("NAEC"), both Manchester, NH, Northeast Nuclear Energy Company ("NNECO") and NU's wholly-owned nonutility subsidiaries, NU Enterprises, Inc. ("NUEI"), a wholly-owned nonutility holding company subsidiary of NU and its direct and indirect wholly-owned subsidiaries, Northeast Generation Company ("NGC"), Northeast Generation Services Company ("NGS"), ES Boulos Company ("Boulos"), Woods Electrical Company, Inc. ("Woods"), Woods Network Services, Inc. ("Woods Network"), Select Energy, Inc. ("Select Energy"), Select Energy New York, Inc. ("SENY"), Mode 1 Communications, Inc. ("Mode 1"); Yankee Energy System, Inc. ("YES"), a wholly-owned holding company subsidiary exempt under 3(a)(1) of the Act by rule 2 and its wholly-owned subsidiaries, Yankee Gas Services Company ("Yankee Gas"), a gas public-utility, Yankee Energy Financial Services Company ("Yankee Financial"), Yankee Energy Services Company ("YESCO") and NorConn Properties, Inc. ("NorConn"); The Rocky River Realty Company ("RR") and The Quinnehtuk Company ("Quinnehtuk"), all Berlin, CT; Select Energy Services, Inc., (formerly HEC Inc.) ("SESI"), Natick, MA, (collectively, the "Applicants"), filed with the Securitiies and Exchange Commission ("Commission") a post-effective amendment to an application-declaration ("Application") under sections 6(a), 7, 9(a), 10, 12(b), 32 and 33 of the Public Utility Holding Company of 1935, as amended ("Act") and rules 43, 53 and 54. The Commission issued a notice of the filing of the Application on June 4, 2003 (Holding Co. Act Release No. 27684).
NU has seven public-utility company subsidiaries, CL&P, WMECO, PSNH, Yankee Gas, HWP, NAEC and NNECO. CL&P, WMECO and PSNH engage, among other things, in the sale of electric energy at retail and Yankee Gas engages in the sale of natural gas at retail. Prior to the sale by the NU system of all of its nuclear assets, NAEC and NNECO were an owner and a manager, respectively, of various nuclear generating assets. As noted above, YES is an intrastate exempt holding company subsidiary of NU. CL&P, WMECO, PSNH, YES and Yankee Gas are referred to collectively below as the "Utility Borrowers."
Applicant nonutility subsidiaries of NU are: NUSCO, the NU system service company; NGC, an exempt wholesale generator ("EWG"); NUEI, a nonutility holding company; RR, Quinnehtuk and NorConn, each a real estate company; SESI, an energy services company; Select Energy, SENY, NGS, Woods, Boulos and YESCO, each a rule 58 company; Mode 1 and Woods Network, each an exempt telecommunications company under section 34 of the Act ("ETC"); and Yankee Financial, a financial services company. The Applicants, with the exception of NUSCO, are also referred to as "Pool Participants" and NU, YES, Mode 1, Woods Network and NGC are referred to as "Non-borrowing Pool Participants."
By order dated December 28, 2000 (the "Prior Order"), the Commission authorized NU, CL&P, WMECO, PSNH, YES and Yankee Gas, among others, to enter into short-term unsecured debt within specified limits and parameters through June 30, 2003. 1 In addition, the Prior Order authorized all of the Applicants, except NUSCO, to enter into short-term debt transactions with NU and to extend credit to, and acquire promissory notes from, one another through their participation in the NU Money Pool. The Prior Order authorized NUSCO to administer the NU Money Pool.
Applicants now seek the following authorizations:
II. The External Financings.
A. General Terms and Conditions.
Financings with third parties by NU and the Utility Borrowers will be subject to the following conditions ("Financing Parameters"): (i) the effective cost of capital on short-term debt financings will not exceed competitive market rates available at the time of issuance for securities having the same or reasonably similar terms and conditions issued by similar companies of reasonably comparable credit quality, provided that in no event will the effective cost of capital on short-term debt borrowings exceed 500 basis points over the comparable term London Interbank Offered Rate, and (ii) the underwriting fees, commissions or other similar remuneration paid in connection with the non-competitive issue, sale or distribution of securities requested will not exceed the greater of 5% of the principal or total amount of the securities being issued.
NU and, of the Utility Borrowers, WMECO, YES and Yankee Gas commit that at all times, during the Authorization Period, each will maintain common equity of at least 30% of its consolidated capitalization (common equity, preferred stock, long-term debt and short-term debt) as reflected in the most recent Form 10-K or Form 10-Q filed with the Commission, adjusted to reflect changes in capitalization since the balance sheet date of such filings. Utility Borrowers CL&P and PSNH, while continuing to be below the 30% ratio when their respective rate reduction bonds are included in the capitalization calculation, as described by the Commission in its March 7, 2000 Order (Holding Co. Act Release No. 35-27147), represent that the factors then found to be mitigating by the Commission (i.e., in relevant part, investment grade ratings of BBB- or better, financial integrity would not be impaired by the proposed transactions and investors and consumers would be benefited) continue to be present at this time and will continue during the Authorization Period.2 As of March 31, 2003, CL&P's consolidated capitalization consisted of 24.8% common equity, 4.0% preferred stock, 42.3% of rate reduction bonds and 28.9% of long-term and short-term debt. When CL&P's rate reduction bonds are excluded, CL&P's consolidated capitalization consisted of 42.9% 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 March 31, 2003, PSNH's consolidated capitalization consisted of 26.8% common equity, 40.4% of rate reduction bonds issued pursuant to State law and 32.8% of long-term and short-term debt. When the PSNH rate reduction bonds are excluded, PSNH's consolidated capitalization consisted of 45% common equity and 55% debt. The credit rating for senior secured debt of PSNH is BBB+ by Standard and Poor's and A3 by Moody's.
NU and the Utility Borrowers further represent that, apart from the securities issued for the purpose of funding money pool operations, no other securities may be issued in reliance upon this Order, unless: (i) the security to be issued, if rated, is rated investment grade; (ii) all outstanding securities of the issuer, that are rated, are rated investment grade; and (iii) all outstanding securities of NU, the top-level registered holding company, that are rated, are rated investment grade ("Investment Grade Condition"). For purposes of this provision, a security will be deemed to be rated "investment grade" if it is rated investment grade by at least one nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of rule 15c3-1 under the Securities Exchange Act of 1934. NU and the Utility Borrowers, in addition, request that the Commission reserve jurisdiction over the issuance of any securities that are not able to meet the Investment Grade Condition.
B. Use of Proceeds.
The proceeds from the short-term debt of NU and the Utility Borrowers authorized by the Commission pursuant to this Application will be used for (i) general corporate purposes, including investments by and capital expenditures of NU and its subsidiaries, including, without limitation, the funding of future investments in EWGs, foreign utility companies (each to the extent permitted under the Act or Commission order), rule 58 subsidiaries and ETCs, (ii) the repayment, redemption, refunding or purchase by NU or any subsidiary of any of its own securities from non-affiliates pursuant to rule 42, and (iii) financing working capital requirements of NU and its subsidiaries.
C. Short-Term Debt Limits.
The Applicants seek external short-term debt financing authorization for NU and the five Utility Borrowers, subject to aggregate limits described below. The external financing authorization for HWP, NAEC and NNECO expires on June 30, 2003 and these utility subsidiaries' authorization will be limited to borrowings through the NU Money Pool, also described below. The short-term debt of NU, CL&P, WMECO, PSNH, HWP, NAEC, NNECO, YES and Yankee Gas outstanding at any one time, whether through external financings (which authorization expires on June 30, 2006) or borrowings through the NU Money Pool (which authorization expires on June 30, 2004), pursuant to the authority requested in this Application, will not exceed the following:
With respect to the Utility Borrowers, as described below, these limitations would include both unsecured and secured debt amounts.
D. Northeast Utilities Short-Term Debt.
NU requests authority to issue and sell, through the Authorization Period, short-term unsecured debt in an aggregate principal amount at any time outstanding not to exceed $400 million. The short-term unsecured debt of NU will take a variety of forms, including commercial paper and notes to banks or other financial institutions, and will be on terms that are generally available to borrowers with comparable credit ratings. All NU short-term unsecured debt will have maturities of less than one year from the date of issuance.
Subject to its short-term debt limit and the Financing Parameters, NU intends to renew and extend outstanding short-term debt as it matures, to refund such short-term debt with other similar short-term debt, to repay such short-term debt or to increase the amount of its short-term debt from time to time.
E. Utility Borrowers' Short-Term Debt.
The Utility Borrowers request authority to issue and sell, through the Authorization Period, short-term unsecured debt, on terms that are generally available to borrowers with comparable credit ratings, subject to the applicable debt limits, Financing Parameters and the same terms as are applicable to NU, described above.
Subject to the applicable short-term debt limits and the Financing Parameters, discussed above, as in the case of NU, the Utility Borrowers intend to renew and extend outstanding short-term debt as it matures, to refund such short-term debt with other similar short-term debt, to repay such short-term debt or to increase the amount of their short-term debt from time to time.
III. Authorization to Engage in Interest Rate Hedge Transactions.
NU and the Utility Borrowers also request authorization5 to enter into interest rate hedging transactions with respect to outstanding indebtedness ("Interest Rate Hedges"), subject to the limitations and restrictions below, in order to reduce or manage the effective interest rate cost. Interest Rate Hedges would only be entered into with counterparties ("Approved Counterparties") whose senior debt ratings, or those of any credit support providers guaranteeing the Approved Counterparties, as published by Standard & Poor's Rating Group, are equal to or greater than BBB, or an equivalent rating from Moody's Investor Service or Fitch IBCA, or through on-exchange transactions.
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. Neither NU nor the Utility Borrowers will engage in speculative transactions within the meaning of such term in Statement of Financial Accounting Standard 133, as amended.
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.
IV. The NU Money Pool.
The Applicants request authorization to continue the NU Money Pool through June 30, 2004, with NUSCO as the NU Money Pool administrator. The Applicants also request continued participation in the NU Money Pool by those companies authorized to participate,6 subject to (a) amendment of the NU Money Pool Agreement to provide for utility subsidiaries' borrowing priority over Nonutility Pool Participants and (b) the Applicants' submission to the Commission by December 31, 2003 of a feasibility study concerning the creation of a separate money pool for nonutility subsidiaries of NU.
The Pool Participants, other than the Non-borrowing Pool Participants, request authority to continue to enter into, from time to time, short-term unsecured debt transactions through the NU Money Pool, to contribute surplus funds to the NU Money Pool and to lend to (and acquire promissory notes from) one another through the NU Money Pool. The Non-borrowing Pool Participants also request authority solely to contribute surplus funds and to lend to the Pool Participants through the NU Money Pool.
In addition, the Applicants seek authorization for Boulos, Woods and SENY to participate in the Money Pool, as both borrowers and lenders, and for Woods Network to participate in the NU Money Pool, solely as a lender, through June 30, 2004.
Finally, the Nonutility Pool Participants request authorization to borrow from the NU Money Pool to the following limits: Quinnehtuk to $10 million, NUEI to $100 million, NGS to $25 million, Select to $200 million, RR to $30 million, Yankee Financial to $10 million, NorConn to $10 million, YESCO to $10 million, SESI (formerly HEC, Inc.) to $35 million, Boulos to $10 million, Woods to $10 million and SENY to $10 million.
NU states that, for purposes of rule 54, although it cannot meet the condition in rule 53(a)(1) (that aggregate investment in EWGs and FUCOs may not exceed 50% of the system's consolidated earnings), NU does meet all other rule 53(a) conditions. In addition, NU asserts that its continued investment in Northeast Generation Company ("NGC") (its only EWG; it has no FUCOs) would not have either of the adverse effects set forth in rule 53(c). With respect to rule 53(a)(1), NU states that, consistent with the Commission's previous determination that NU's financing of its investment in NGC would not have either of the adverse effects set forth in rule 53(c),7 NU's continuing investment in NGC will not have either of such adverse effects during the Authorization Period. Although since March 7, 2000, the date of the Commission's Order, the common equity ratio of NU on a consolidated basis has decreased, NU asserts that it still remains at a financially healthy level above the 30% benchmark required by the Commission and, if rate reduction bonds are excluded, the consolidated common equity ratio has increased. As of March 31, 2003, NU's consolidated capitalization consisted of 33.4% common equity, 1.7% preferred stock, 27.8% of rate reduction bonds, and 37.1% debt. When the rate reduction bonds are excluded, NU's consolidated capitalization consisted of 46.2% common equity, 2.4% preferred stock and 51.3% debt. At March 31, 2003, NU states that its "aggregate investment" in EWGs and FUCOs was approximately $448.2 million or approximately 60% of NU's average "consolidated retained earnings" of $744.9 million for the four quarters ended March 31, 2003, as those terms are defined in rule 53(a)(1). Accordingly, its investment in its EWG has not had an adverse impact on its financial integrity.
NU states, moreover, that it and its subsidiaries are in compliance, and will continue to comply, with the other provisions of rule 53(a) and (b). NU further states that the proposed transactions, considered in conjunction with the effect of the capitalization and earnings of its single EWG (it has no 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.
Fees associated with specific borrowing or issuances of commercial paper are stated above. Fees, commissions and expenses of the Applicants expected to be paid or incurred for legal, financial, accounting and other services, directly or indirectly, in connection with the transactions are estimated to not exceed $10,000. Applicants state that, other than as stated above, no other State or federal commission other than this Commission, has jurisdiction over the proposed transactions.
Due notice of the filing of the Application 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, except as to those matters over which jurisdiction has been reserved, 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 rules that, except as to matters as to which jurisdiction has been reserved, the Application, as amended, is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act, in particular rule 24(c)(2).
IT IS FURTHER ORDERED that jurisdiction is reserved over the following transactions: (1) the issuance of secured debt by the Utility Borrowers to their respective aggregate limits; (2) the release of borrowing limits on Nonutility Pool Participants; (3) the addition of participants to the NU Money Pool; and (4) the issuance by NU or the Utility Borrowers of any securities for which the Investment Grade Condition cannot be met; pending completion of the record.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
1 Holding Co. Act Release No. 27328.
2 In Holding Co. Act Release No. 35-27147 (March 7, 2000), the Commission noted that NU, CL&P, WMECO and PSNH would all be below the Commission's benchmark of 30% common equity-to-total capitalization ratio if rate reduction bonds, anticipated as a result of state legislation, were included in the calculation. The Commission found that, because of the exceptional circumstance of state restructuring legislation, the following representations mitigated the fact that the utilities were below the 30% test: (1) that CL&P, PSNH and WMECO had investment grade ratings of BBB-or better; (2) that CL&P, PSNH and WMECO's financial integrity would not be impaired by the proposed payment of dividends; (3) that CL&P, PSNH and WMECO had, and would continue to have, following the consummation of the transactions, adequate cash and access to working capital facilities to meet and support their normal business operations and, finally, (4) that the proposed payment of dividends would be in the public's interest because both investors and consumers benefited. See also Holding Co. Act. Release No. 35-27529 (May 11, 2002).
3 CL&P's aggregate unsecured debt is also restricted by charter provisions relating to its preferred stock. CL&P is authorized by its preferred stockholders, through March 31, 2004, to issue securities representing unsecured indebtedness to a maximum of 20% of its capitalization. Based on its capitalization as of December 31, 2002, CL&P is limited to $480 million of unsecured indebtedness, which exceeds the authorization sought here.
4 PSNH aggregate short-term debt is restricted by New Hampshire law to an amount equal to 10% of its net fixed plant without further New Hampshire Public Utilities Commission ("NHPUC") approval. Any short-term debt of PSNH in excess of 10% of net fixed plant would require NHPUC approval and would be exempt from this Commission's jurisdiction pursuant to rule 52(a). PSNH has approval from NHPUC to issue up to $100 million in short-term debt (an amount exceeding the 10% of net fixed plant debt limit) for general corporate purposes. NHPUC Order 23,841 (November 9, 2001).
5 NHPUC also has jurisdiction over the issuance of Interest Rate Hedges by PSNH, a Utility Borrower.
6 Massachusetts Department of Telecommunications and Energy ("MDTE") authorization is required under Massachusetts General Laws for WMECO's lending of funds to the NU Money Pool. The MDTE (formerly the Massachusetts Public Utilities Commission) granted WMECO such approval on October 29, 1986 as to lending of funds to CL&P, HWP, NNECO, Quinnehtuk and RR. Without further MDTE authorization, WMECO may not lend its funds to other companies through the NU Money Pool.
In addition, PSNH has NHPUC authorization to participate in the NU Money Pool (NHPUC Order 20,416 (March 19, 1992)). Without prior NHPUC approval, PSNH may not issue short-term debt in excess of 10% of its net fixed plant limit. See note 4, supra.
7 See Northeast Utilities, Holding Co. Act Release No. 27148 (March 7, 2000).