SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27901; 70-10234)
Order Authorizing Guarantees
October 19, 2004
Northeast Utilities ("NU"), Berlin, Connecticut, a Massachusetts business trust and registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), has filed a declaration ("Declaration") with the Securities and Exchange Commission ("Commission") under section 12(b) of the Act and rules 45 and 54 under the Act. The Commission issued a notice of the Declaration on August 24, 2004 (HCAR No. 27885). No requests for hearing were received by the Commission.
NU requests authority, for the period ending June 30, 2007 ("Authorization Period"), to guarantee, indemnify and otherwise provide credit support (each, a "Guarantee") up to an aggregate amount not to exceed $100 million outstanding at any one time with respect to the debt or obligations of the Northeast Utilities Service Company ("NUSCO") and The Rocky River Realty Company ("RRR") (together, the "Service Subsidiaries").
NU's wholly owned public utility subsidiaries are The Connecticut Light and Power Company, Public Service Company of New Hampshire, and Western Massachusetts Electric Company. Together, these companies furnish retail and wholesale electric service in Connecticut, New Hampshire, western Massachusetts and throughout the Northeast United States. NU is also the parent of a number of other companies, among them NUSCO, a service company subsidiary of NU, and RRR, a non-utility subsidiary of NU.
NUSCO, a Connecticut corporation, provides centralized support services to NU system companies, including accounting, administrative, information technology, engineering, financial, legal, operational, planning and purchasing services.
RRR, also a Connecticut corporation, performs various real estate functions for associate companies at cost, including among other things, the acquisition or construction, and ownership of office and other buildings and the leasing thereof to associate companies. As of June 30, 2004, RRR had total assets of approximately $71 million, mainly made up of real estate property and equipment, including the main office facilities of the NU system located in Berlin, Connecticut, which it leases to affiliated companies in the NU system.
NU requests authorization, through the Authorization Period, to provide Guarantees with respect to the obligations of the Service Subsidiaries as may be appropriate or necessary to enable the Service Subsidiaries to carry on in the ordinary course of their respective businesses, in an aggregate amount that shall not exceed $100 million outstanding at any one time. Any Guarantees outstanding at the end of the Authorization Period will remain in place and expire or terminate in accordance with their terms.
NU submits that the Guarantees sought here may take the form of NU agreeing to guarantee, undertake reimbursement obligations or assume liabilities or other obligations with respect to or act as surety on, real estate and equipment leases, letters of credit, evidences of indebtedness, equity commitments, contract guarantees, surety bonds, rating contingent collateralization provisions and performance and other obligations undertaken by the Service Subsidiaries. In addition, the Service Subsidiaries may request NU to provide payment and performance guarantees in connection with the real-estate contracting activities of RRR, including construction, acquisition and leasing of properties and facilities utilized by certain NU system companies.
NU currently anticipates that the majority of any Guarantees issued by NU for the benefit of NUSCO will be Guarantees of equipment leases and that the majority of any Guarantees issued by NU for the benefit of RRR will be Guarantees of real estate leases. NU wishes to have the flexibility to Guarantee other obligations undertaken by the Service Subsidiaries.
NU represents that Guarantees may be provided from time to time with respect to obligations of the Service Subsidiaries that are not capable of exact quantification because of the nature of the services or performance being guaranteed, and therefore, the amount of such Guarantee must be estimated. In such cases, NU will determine the exposure under such Guarantee for the purposes of measuring compliance with the $100 million aggregate limitation in accordance with standard and customary financial practices, including estimation of exposure based on loss experience or projected potential payment amounts. If appropriate, such estimates will be made in accordance with generally accepted accounting principles. Estimates will be re-evaluated periodically.
NU represents that it may charge each Service Subsidiary a fee for each Guarantee provided on its behalf. The fee will be determined by multiplying the amount of the Guarantee provided by the cost of obtaining the liquidity necessary to perform the Guarantee for the period of time the Guarantee remains outstanding. The service Subsidiaries will allocate these costs to their affiliate receiving the services being Guaranteed on a pro rata basis, based on the value of the services received by the affiliate.
NU commits that it will, at all times during the Authorization Period, maintain common equity of at least 30% of its consolidated capitalization (i.e., common equity, preferred stock, long-term debt and short-term debt), including Rate Reduction Bonds as 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 the filings.
NU represents that the issuance of Guarantees by NU, as proposed in the instant Declaration, is not expected to have any impact on NU's credit ratings.
Guarantees issued pursuant to this Declaration will be subject to the limitations of rules 53 and 58, as applicable.
NU represents that it currently meets all of the conditions of rule 53(a), except for clause (1). At June 30, 2004, NU's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $448.2 million, or approximately 53.6% of NU's average "consolidated retained earnings," also as defined in rule 53(a)(1), for the four quarters ended June 30, 2004 ($836 million). With respect to rule 53(a)(1), however, the Commission has determined that NU's financing of its investment in EWGs in an amount not to exceed $1 billion would not have either of the adverse effects set forth in rule 53(c).1 NU continues to assert that its EWG investments will not adversely affect the system. In addition, NU represents that it and its subsidiaries are in compliance and will continue to comply with the other provisions of rule 53(a) and (b).
NU states that the proposed transactions, considered in conjunction with the effect of the capitalization and earnings of NU's EWG, 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 public-utility customers.
NU states that its common equity as a percentage of consolidated capitalization ("Common Equity Ratio") as of June 30, 2004 was 34.8%. If Rate Reduction Bonds were excluded from the calculation, the Common Equity Ratio as of June 30, 2004 would be 46.0%.
The fees, commissions and expenses incurred or to be incurred in connection with the Declaration will not exceed $25,000. NU represents that no state or federal regulatory agency, other than the Commission, has jurisdiction over the requested authority.
Due notice of the filing of this 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. Based on the facts in the record, the Commission finds that the applicable standards of the Act and rules 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, 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.
Margaret H. McFarland
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