SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27873; 70-9905)
Connecticut Light and Power Company, et al.
Supplemental Order Authorizing Accounts Receivable Factoring; Payment of Dividends Out of Capital
July 6, 2004
The Connecticut Light and Power Company ("CL&P"), a wholly owned electric utility subsidiary of Northeast Utilities ("NU"), a registered public utility holding company, and CL&P Receivables Corporation ("CRC") (together, "Declarants"), a wholly-owned special purpose subsidiary of CL&P, both located in Berlin, Connecticut, have filed a post-effective amendment with the Securities and Exchange Commission ("Commission") under sections 12(b) and 12(c) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 45, 46 and 54 under the Act to a previously filed declaration ("Declaration"). The Commission issued a notice of the filing of the Declaration on May 21, 2004 (HCAR No. 27847).
By orders dated September 29, 1997 and October 15, 2001 (HCAR Nos. 26761 and 27453) ("Orders"), the Commission authorized CL&P to organize CRC to engage in an accounts receivable purchase and sale program through July 8, 2004 and to, among other things, permit CRC to pay CL&P dividends out of capital from time-to-time to achieve the optimum balance of capital to achieve economic efficiency ("Program"). CL&P and CRC now propose to extend the Program through July 3, 2007, under the same terms and conditions.
The Program consists of two agreements. Under the first agreement, between CL&P and CRC ("Company Agreement"), CL&P sells or transfers as equity contributions from time-to-time all eligible categories of its billed and unbilled accounts receivable ("Receivables") and related assets ("Related Assets") to CRC. The purchase price paid by CRC for any Receivables and Related Assets takes into account historical loss statistics on CL&P's receivables pool and the purchaser's ("Purchaser") cost of funds. Under the second agreement ("CRC Agreement"), CRC sells fractional undivided interests ("Receivable Interests") in the Receivables to the Purchaser from time-to-time.
The availability of Receivables and Related Assets varies from time-to-time in accordance with electric energy use by CL&P's customers. As a result of this and certain other factors, the funds CRC has available to make a purchase at any time may not match the cost of Receivables and Related Assets available. The Program includes certain mechanisms to accommodate this mismatch. When the amount of Receivables and Related Assets originated by CL&P exceeds the amount of cash CRC has available, either CRC will make the purchase and owe the balance of the purchase price to CL&P on a deferred basis (the unpaid portion will accrue interest or the purchase price will involve a discount to reflect the deferral), or CL&P will make a capital contribution to CRC in the form of the Receivables and Related Assets for which CRC lacks purchase price funds at that time. Conversely, if CRC develops a substantial cash balance (due to collections of previously transferred Receivables exceeding the balance of newly created Receivables available for purchase), CRC will likely dividend the excess cash to CL&P. These dividends may represent a return of previous capital contributions by CL&P to CRC. Through these mechanisms, CRC does not itself retain substantial cash balances at any time and substantially all cash realized from the collection of the Receivables (net of the costs of the program and any reductions in the outstanding balance of Receivable Interests) is made available to CL&P.
CL&P and CRC will continue to be obligated to reimburse the Purchaser and its agent ("Agent") for various costs and expenses associated with the Company Agreement and the CRC Agreement upon extension of the Program. CRC will also continue to be required to pay to the Agent certain fees for services in connection with these agreements.
CL&P proposes to extend the agreements to extend the Program through July 3, 2007. CRC may, following written notice to the Agent, terminate in whole or reduce in part the unused portion of its purchase limit in accordance with the terms and conditions of the CRC Agreement. The CRC Agreement allows the Purchaser to assign all of its rights and obligations under the CRC Agreement (including its Receivable Interests and the obligations to fund Receivable Interests) to other persons. However, any assignment will not change the nature of the obligations of CL&P or CRC under the Company Agreement and the CRC Agreement.
NU currently meets all of the conditions of rule 53(a), except for rule 53(a)(1), which limits NU's "aggregate investment" in exempt wholesale generators ("EWGs"), as defined in section 32 of the Act, and foreign utility companies ("FUCOs"), as defined in section 33 of the Act, to 50% of the system's "consolidated retained earnings," provided that none of the adverse conditions specified in Rule 53(b) exist ("Safe Harbor Limitation"). NU states that as of December 31, 2003, NU's "aggregate investment," as defined in rule 53(a)(1), in NGC, NU's only EWG or FUCO, was approximately $448.2 million, or approximately 55.1% of NU's "average consolidated retained earnings," also defined in rule 53(a)(1), which were approximately $813.8 million for the previous four quarters. The investment amount, therefore, exceeds the Safe Harbor Limitation contained in the rule.
However, regarding rule 53(a)(1), the Commission determined that NU investments in EWGs and FUCOs in amounts not exceeding $481 million ("Investment Limitation"),1 would not have either of the adverse effects described in rule 53(c) (HCAR No. 27148; March 7, 2000) ("Rule53(c) Order").2 For the period ended December 31, 2003, NU's $448.2 million aggregate investment in EWGs and FUCOs remains below the Investment Limitation of $481 million. NU continues to be in compliance with the other provisions of rule 53(a) and none of the conditions enumerated in rule 53(b) exists.
The Rule 53(c) Order was predicated, in part, on an assessment of NU's overall financial condition, which considered NU's consolidated capitalization ratio and its retained earnings, both of which have improved since the date of the order. NU's sole EWG investment (it has no FUCO investment) has been profitable for all quarterly periods ending June 30, 2000 through December 31, 2003. As of December 31, 1999, the most recent period for which financial statements were 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 consolidation capitalization ratios of NU, with consolidated debt including all short-term debt and non-recourse debt of its EWG, were 36.9% common equity, 4.3% preferred stock and 58.8% long-term debt. As of December 31, 2003 and on the same basis, NU's consolidated capitalization ratios were 33.5% common equity, 1.7% preferred stock, 39.2% long and short-term debt and 25.6% rate reduction bonds. NU states that its EWG investment contributed positively to its consolidated earnings since the Rule 53(c) Order.
In particular, NU states that NGC has made a positive contribution to earnings by contributing $143.8 million in revenues in the 12-month period ending December 31, 2003 and net income of $38.5 million for the same period. While NU's common equity ratio has decreased since the Rule 53(c) Order, it remains above the 30% ratio required by the Commission. Accordingly. NU states that its EWG investment has not had an adverse impact on NU's financial integrity.
Fees and expenses in the estimated amount of $115,000 are expected to be incurred in connection with the proposed transactions. The Connecticut Department of Public Utility Control has approved the proposed transactions. No other state or federal Commission has jurisdiction over the proposed program.
Due notice of the filing of the Declaration 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. On the basis of the facts in the record, it is found that the applicable standards of the Act and the rules under the Act are satisfied, and that no adverse findings are necessary.
IT IS ORDERED under the applicable standards of the Act and the rules under the Act that the Declaration be permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act and provided that the Declarants will continue to supplement the reports required by the Orders to be filed under rule 24 on a quarterly basis, to include the applicable terms and conditions set out in the Orders.
For the Commission, by the Division of Investment Management, under delegated authority.
Margaret H. McFarland
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