SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27748; 70-10112)

Northeast Utilities, et al.

Order Authorizing Payments of Dividends and Repurchases of Stock Out of Capital or Unearned Surplus

November 7, 2003

Northeast Utilities ("NU"), West Springfield, Massachusetts, a registered public-utility holding company under the Public Utility Holding Company Act of 1935 ("Act"), and Northeast Nuclear Energy Company ("NNECO"), Berlin, Connecticut, NU's wholly owned subsidiary (together "Applicants"), filed with the Securities and Exchange Commission ("Commission") an application-declaration ("Application") under sections 6(a), 7 and 12(c) of the Act and rules 26(c)(3), 42, 43, 44 and 46(a). The Commission issued a notice of the filing of the Application on October 10, 2003 (Holding Co. Act Release No. 27735).

NU and NNECO have requested authorization for NNECO to pay dividends to and, or in the alternative, to repurchase stock from, NU out of capital or unearned surplus through December 31, 2004 ("Authorization Period"). NNECO is in the process of winding up its business.

NNECO was incorporated in 1950. Through a Special Act of the Connecticut Legislature passed in 1967, the company has a valid franchise under Connecticut law to sell electricity to utility companies engaging in electric business in Connecticut and other states; to manufacture, generate and transmit electricity; and to erect and maintain facilities on certain public highways and grounds. NNECO's sole activity has been to act as agent for the NU system companies and other New England utilities in operating and maintaining the Millstone nuclear generating facilities located in Waterford, Connecticut ("Millstone").

Until March 2001, Millstone's facilities were jointly owned by The Connecticut Light and Power Company ("CL&P") and Western Massachusetts Electric Company ("WMECO") (two public-utility subsidiaries of NU and associate companies of NNECO) and other nonaffilitated utility companies. In March 2001, CL&P, WMECO and most of the other joint owners of Millstone sold their interests in Millstone to a subsidiary of Dominion Resources, Inc. CL&P and WMECO sold their 100% interests in Millstone 1 and 2 and, with other selling owners, 94% of Millstone 3. As a result, NNECO no longer acts as agent for any owner in the operation and maintenance of Millstone 1, 2 or 3. It is largely inactive and is winding up its business. NU continues to maintain NNECO as a corporate entity in the event that any unforeseen liabilities arise from past Millstone operations. Nevertheless, to simplify its corporate structure, NU intends to liquidate and dissolve NNECO eventually.

NNECO would like to return up to $16.2 million to NU, an amount equal to the approximate value of NNECO's common stockholders' equity. The Applicants represent that, as of June 30, 2003, NNECO's paid-in-capital surplus equaled approximately $15.3 million and retained earnings equaled approximately $0.9 million, for total capitalization of approximately $16.2 million. As of June 30, 2003, NNECO had approximately $48.3 million invested in the NU system money pool and approximately $0.7 million in other current and accrued assets. As of June 30, 2003, NNECO's net liabilities totaled approximately $32.8 million. These net liabilities are mainly comprised of (i) approximately $20.6 million of net accrued pension costs reflecting amounts due former employees of NNECO,¹ (ii) approximately $9.2 million of other employee-related costs, (iii) $1.4 million in federal income taxes due, and (iv) approximately $1.6 million of other obligations.²

NU and NNECO seek authorization for NNECO to pay dividends to and, or in the alternative, to repurchase its common stock from, NU out of paid-in-capital and unearned surplus up to $16.2 million during the Authorization Period. The companies state that they do not anticipate any further obligations being incurred. They further assert that the proposed transactions will not impair NNECO's ability to meet its obligations nor render its assets insufficient to meet anticipated expenses or liabilities.³

NNECO states that Connecticut law allows payments of dividends by corporations, provided that such payments do not render a company insolvent.⁴ In addition, NNECO represents that any capital distributed by NNECO, if authorized by the Commission, would be paid in accordance with state law.

Under rule 54, the proposed transactions are subject to rule 53(a), (b) and (c). NU states that, for purposes of rule 54, it meets all of the conditions of rule 53(a), except for rule 53(a)(1) (the "safe harbor," which provides that aggregate investment in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs") is permitted so long as it does not exceed 50% of a system's consolidated earnings); and that none of the adverse conditions of rule 53(b) exist. With respect to rule 53(c), NU asserts that its continued investment in its only EWG⁵ will not have the adverse effects set forth in rule 53(c), as discussed below, and, as a result, NU satisfies the requirements of rule 54.

NU states that, as of June 30, 2003, its "aggregate investment" in its EWG was approximately $448.2 million, or approximately 57.8% of NU's average "consolidated retained earnings" of $775 million for the four quarters ended June 30, 2003, as both those terms are defined in rule 53(a)(1), exceeding the parameters of the rule 53(c)(1) safe harbor. Nevertheless, by its March 7, 2000 order in Northeast Utilities, Holding Co. Act Release No. 27148, the Commission authorized NU to exceed the 50% safe harbor limit of rule 53(a)(1) for the financing of its investment in its EWG, determining that the aggregate investment would not have either of the adverse effects set forth in rule 53(c).

Under the Commission's March 7, 2000 order, therefore, NU's investment at this level is permitted (although this aggregate investment level in its EWG currently⁶ exceeds the rule 53(a)(1) safe harbor). Consequently, in accordance with rule 54, the Commission will not consider the effect on the NU system of the capitalization or earnings of any NU subsidiary that is an EWG (or a FUCO) in determining whether to approve the proposed transactions. NU states, in addition, that it and its subsidiaries are in compliance, and will continue to comply, with the other provisions of rule 53(a) and (b).

Fees, commissions and expenses incurred in connection with these transactions are expected not to exceed $10,000 and are expected to be primarily ordinary legal and accounting fees. None of the fees, commissions or expenses will be paid to any associate company or affiliate of the Applicants, except Northeast Utilities Service Company, for financial and other services. No other state or federal regulatory approval is required for the proposed transactions.

Due notice of the filing of the Application has been given in the manner prescribed in 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 and rules are satisfied and no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules, that 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.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

Endnotes:

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¹ NNECO has $48.9 million of accrued pension costs and an accumulated deferred income tax credit of $28.3 million, which is realized as NNECO makes contributions to the pension plan, leaving a net obligation of $20.6 million.

² Because NNECO's net accrued pension obligations are owed to the Northeast Utilities Retirement Plan and the plan owes the employees, NNECO need not continue to exist until all former employees receive their pension benefits. The plan will pay these benefits. NNECO's obligations to the plan will be paid or otherwise satisfied prior to NNECO's dissolution.

³ Payment of dividends out of capital or unearned surplus by a subsidiary of a registered holding company has been approved when payment would not impair the subsidiary's ability to meet its obligations and the subsidiary's assets would be sufficient to meet any anticipated expenses or liabilities. See AEP Generating Co., Holding Co. Act Release No. 26754 (August 12, 1997); see also Northeast Utilities, et al., Holding Co. Act Release No. 27529 (May 16, 2002), Northeast Utilities, et al., Holding Co. Act Release No. 27147 (March 7, 2000).

⁴ Section 33-687(c) of the General Statutes of Connecticut states: "No distribution may be made if, after giving it effect: (1) The corporation would not be able to pay its debts as they become due in the usual course of business; or (2) the corporation's total assets would be less than the sum of its total liabilities plus, unless the certificate of incorporation permits otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution." To authorize a distribution, the board of directors is permitted to base its decision "on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances, or on a fair valuation or other method that is reasonable in the circumstances." Sec. 33-687(d).

⁵ NU has no FUCOs at this time.

⁶ The EWG investment has been profitable for all quarterly periods ending June 30, 2000 through June 30, 2003 (i.e., since it was acquired). The March 7, 2000 order, authorizing the EWG acquisition, was based, in part, on an assessment of NU's financial condition, considering, among other factors, its consolidated capitalization ratio and its retained earnings. Since the date of the order, both have improved. NU's consolidated capitalization ratio as of December 31, 1999 (the date of the information evaluated in the order) 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 order), its consolidated capitalization ratio consisted of 36.9% common equity and 63.1% debt (including all short-term and non-recourse debt of the EWG). As of June 30, 2003, NU's consolidated capitalization ratio consisted of 32.9% common equity and 67.1% debt (including all short-term and non-recourse debt of the EWG). This last period also included NU's rate reduction bonds. If the rate reduction bonds are excluded, NU's capitalization ratio consists of 45% common equity and 53.2% debt.

NU's consolidated retained earnings as of June 30, 2000 (the end of the first quarter after the March 7, 2000 rule 53(c) order) were $640 million. As of June 30, 2003, NU's consolidated retained earnings were $798.8 million. In the 12-month period ending June 30, 2003, the EWG has also made a positive contribution to NU's earnings ($135.4 million in revenues and net income of $34.6 million). While NU's common equity ratio on a consolidated capitalization basis has decreased since the March 7, 2000 order, it remains above the Commission's 30% benchmark. The common equity ratio has increased if the rate reduction bonds are excluded. NU's EWG investment does not appear to have had an adverse impact on the system's financial integrity, or on its public-utility subsidiaries, their customers, or the ability of the state commissions to protect such customers.