-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AUYwF8I77tcTn/PaECu9HyTK0q4PzM/GeyXJJk6884Xf4DWzC/L/yaM1sK5ybhIu IFNMzHhkeXYZnqIcZCrYCA== 0000072741-96-000143.txt : 19961111 0000072741-96-000143.hdr.sgml : 19961111 ACCESSION NUMBER: 0000072741-96-000143 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19961108 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHEAST UTILITIES CENTRAL INDEX KEY: 0000072741 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 042147929 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: 1935 Act SEC FILE NUMBER: 070-08895 FILM NUMBER: 96657568 BUSINESS ADDRESS: STREET 1: 174 BRUSH HILL AVE CITY: WEST SPRINGFIELD STATE: MA ZIP: 01090-0010 BUSINESS PHONE: 2036655000 MAIL ADDRESS: STREET 1: 107 SELDON ST CITY: BERLIN STATE: CT ZIP: 06037-1616 U-1/A 1 AMENDMENT NO. 2 TO FORM U-1 FILE No. 70-8895 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM U-1 AMENDMENT NO. 2 TO APPLICATION/DECLARATION WITH RESPECT TO INTEREST RATE MANAGEMENT INSTRUMENTS Under THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 NORTHEAST UTILITIES HOLYOKE WATER POWER COMPANY 174 Brush Hill Avenue 1 Canal Street West Springfield, MA 01090-0010 Holyoke, MA 01040 THE CONNECTICUT LIGHT AND PUBLIC SERVICE COMPANY POWER COMPANY OF NEW HAMPSHIRE 107 Selden Street 1000 Elm Street Berlin, CT 06037 Manchester, NH 03101 WESTERN MASSACHUSETTS NORTH ATLANTIC ELECTRIC COMPANY ENERGY CORPORATION 174 Brush Hill Avenue 1000 Elm Street West Springfield, MA 01090-0010 Manchester, NH 03101 (Names of companies filing this application and addresses of principal offices) NORTHEAST UTILITIES (Name of top registered holding company) Jeffrey C. Miller Assistant General Counsel Northeast Utilities Service Company 107 Selden Street Berlin, CT 06037 (Name and address of agent for service) The Commission is requested to mail signed copies of all orders, notices and communications to: Jane P. Seidl David R. McHale Senior Counsel Assistant Treasurer Northeast Utilities Service Northeast Utilities Service Company Company 107 Selden Street 107 Selden Street Berlin, CT 06037 Berlin, CT 06037 The Application/Declaration in this proceeding, as previously amended,is hereby further amended as follows: Items I, II and V are restated in full as follows: I. DESCRIPTION OF PROPOSED TRANSACTIONS (a). Description of Proposed Transactions 1. Northeast Utilities ("NU"), a registered holding company, and certain of its subsidiaries, The Connecticut Light and Power Company ("CL&P"), Western Massachusetts Electric Company ("WMECO"), Public Service Company of New Hampshire ("PSNH"), North Atlantic Energy Corporation ("NAEC") and Holyoke Water Power Company ("HWP") (collectively NU, CL&P, WMECO, PSNH, NAEC and HWP are referred to herein as "System Companies"), hereby request approval, if and to the extent required under the Public Utility Holding Company Act of 1935 (the "Act"), to enter into, perform, purchase and sell financial instruments intended to manage the volatility of interest rates, including but not limited to interest rate swaps, caps, floors, collars and forward rate agreements or any other similar agreements ("Interest Rate Management Instruments") to the extent any such transactions are jurisdictional under the Act, for the period ending December 31, 2001, in a total notional principal amount not to exceed 25% of the total outstanding debt at any one time for each System Company individually (with the exception of NAEC, for which the maximum would be 65%). 2. The System Companies propose to employ various types of Interest Rate Management Instruments as a means of (i) prudently managing their portfolios of outstanding long-term and short-term debt, such that they can achieve some degree of control over the impact on earnings and customer rates resulting from movements in interest rates, and (ii) prudently managing the risk associated with the issuance of new long-term and short-term debt. 3. The System Companies have used Interest Rate Management Instruments in the past primarily to manage floating interest rate exposure through the use of interest rate swaps and interest rate caps. Exhibit G lists the System Companies' use of Interest Rate Management Instruments since 1990, including both outstanding and matured positions. 4. With the objectives of optimizing the variable-to-outstanding debt ratio and mitigating the exposure of customer rates and earnings to changes in interest rates, the System Companies will manage the debt portfolio in accordance with prudent financial management practices and make an assessment of the projected impact on the companies' rate tariffs (for those System Companies serving customers pursuant to rate tariffs) and earnings per share. Such management includes but is not limited to an analysis of (i) current and projected level of interest rates, (ii) the current level of each System Company's debt, (iii) future debt maturities, and (iv) future financing requirements. 5. Interest Rate Management Instruments are the tools by which the System Companies can achieve such balance by, in effect, synthetically (i) converting variable rate debt to fixed rate debt, (ii) converting fixed rate debt to variable rate debt, (iii) limiting the impact of changes in interest rates resulting from variable rate debt, and (iv) providing an option to enter into Interest Rate Management Instrument transactions in future periods for both existing exposures and planned issuances of debt securities. 6. The notional principal amount of Interest Rate Management Instruments for each System Company individually will not exceed 25% of the total outstanding debt, with the exception of NAEC for which the maximum would be 65%, at any one time. This exception results from an existing interest rate swap associated with a $225 million term note and NAEC's anticipated future total outstanding debt levels when taking into account the $20 million annual sinking fund provision on its 9.05% first mortgage bonds. "Total outstanding debt" is defined as the sum of the outstanding short-term and long-term debt rounded to the nearest million dollars. For each individual company the table below lists the level of total outstanding debt at June 30, 1996, the proposed sub-limits as a percentage of total outstanding debt, and the resulting indicative dollar limit of notional principal based on the levels of total outstanding debt at June 30, 1996. Indicative Dollar Limit - % of Total Out- Outstanding % Hedge Standing Company Debt (6/30/96) Limit Debt - ---------------------------------------------------------------------------- The Connecticut Light and Power Company $1,990,000,000 25% $497,500,000 Public Service Company of New Hampshire $736,000,000 25% $184,000,000 Western Massachusetts Electric Company $366,000,000 25% $91,500,000 North Atlantic Energy Corporation $520,000,000 65% $338,000,000 Holyoke Water Power Company $38,000,000 25% $9,500,000 Northeast Utilities (Parent) $244,000,000 25% $61,000,000 Totals $3,894,000,000 30% $1,181,500,000 7. In no case will the notional principal amount of any Interest Rate Management Instrument exceed that of the underlying debt instrument and related interest rate exposure, i.e., no System Company will engage in "leveraged" or "speculative" transactions. In addition, System Companies propose to limit the tenor of Interest Rate Management Instruments to the maximum maturity of the underlying System Company debt, or the maturity of anticipated specific future debt issuances, proportionate to the amount of indebtedness at each maturity level. 8. The underlying interest rate indices of such Interest Rate Management Instruments will closely correspond to the underlying interest rate indices of the System Companies' debt to which such Interest Rate Management Instruments relate. Such indices currently include but are not be limited to (i) floating rate indices such as the London Interbank Offered Rate (LIBOR), prime rate, certificate of deposit rates, commercial paper indices, the Federal funds rate, the J.J. Kenny high grade tax-exempt rate, and the Public Securities Association Index tax-exempt rate, and (ii) fixed rate indices such as United States Treasury note and bond rates and long-term municipal bond rates. 9. The terms and conditions of the proposed Interest Rate Management Instrument transactions will be the same or substantially similar to those of the International Swap Dealers Association, Inc. (ISDA) Master Agreement, the form of which is filed as Exhibit B.1. Each System Company would enter into an individual Master Agreement with each proposed counterparty. A confirmation pursuant to the Master Agreement would identify the nature of each individual transaction, the applicable notional principal amount, effective date, maturity, rates involved and other pertinent terms and conditions. The System Companies will enter into Interest Rate Management Instruments with counterparties whose senior secured debt ratings, as published by Standard & Poor's Corporation, are greater than or equal to "BBB+", or an equivalent rating from Moody's Investor Service, Inc., Fitch Investor Service or Duff & Phelps. Additionally, at all times at least 75% of the outstanding aggregate principal amount of Interest Rate Management Instruments will be held by counterparties possessing Standard & Poor's Corporation credit ratings of "A" rating or higher or equivalent rating. In accordance with the ISDA Master Agreement, it is anticipated that each party to a proposed Interest Rate Management Instrument transaction will have the right to terminate such transactions by making early termination payments. Attached hereto as Exhibit B.II is a copy of the Risk Management Program Policies and Practices for System Companies participating in Interest Rate Management Instrument transactions. 10. Interest Rate Management Instruments are subject to numerous variables which will affect their cost, including (i) tenor, (ii) the strike rate, or the rate at which it becomes effective, (iii) volatility of interest rates, (iv) the current and projected level of interest rates, (v) the notional principal amount of the Interest Rate Management Instrument, and (vi) market variables such as the liquidity of the specific Interest Rate Management Instrument. As such, it is difficult for the System Companies to estimate the price they will pay for Interest Rate Management Instruments. However, the System Companies will undertake to limit the transaction costs of Interest Rate Management Instruments. The cost of instruments requiring upfront payments such as interest rate caps will be limited to five percent of the principal amount of the transaction. In the case of a sale of an Interest Rate Management Instrument such as one with an interest rate floor, the company could use such proceeds to lower the purchase price of a corresponding Interest Rate Management Instrument, such as an interest rate cap pertaining to the same debt obligation. The System Companies will not enter into (a) a floating-to-fixed interest rate swap in which the swap fixed interest rate, excluding any credit spread associated with the underlying instrument, would exceed the higher of (i) 200 basis points over the yield on U.S. Treasury obligations of comparable maturities or (ii) the fixed interest rate similar issuers pay in respect of comparable debt bearing comparable maturities; and (b) a fixed-to-floating interest rate swap in which the swap floating interest rate, excluding any credit spread associated with the underlying instrument, would be more than 200 basis points over the applicable index rate used for the swap. Furthermore, the System Companies will enter into a floating-to-fixed interest rate swap, as opposed to reducing its floating rate debt and issuing a fixed-rate note of a comparable maturity, only if the estimated costs associated with the floating-to-fixed interest rate swap, including transaction costs, are less than the estimated costs of issuing the fixed rate debt and costs, if any, of prudently reducing the floating rate debt. 11. The System Companies will fully disclose in their financial statements the extent of their Interest Rate Management Instrument transactions in accordance with current and future Commission requirements, generally accepted accounting principles, and Financial Accounting Standards Board ("FASB") practices. Current financial statements disclosures include (i) notional principal amount and (ii) market value of outstanding Interest Rate Management Instruments outstanding. In addition, the System Companies undertake to provide the following reports to the Commission in lieu of the requirements of Rule 24(a) under the Act: (a) Within thirty days following the trade date of any Interest Rate Management Instrument, the System Company will submit a report to the Commission disclosing the following information: the trade date; the type of Interest Rate Management Instrument traded; the notional principal amount; the new interest rate or a description of the index and margin; the termination date; the credit rating of the counterparty; and the material terms of the underlying instrument (including the interest rate (or index and margin) and the maturity or termination date of such instrument); (b) Within forty-five days following the close of each fiscal quarter, each System Company will submit a report to the Commission disclosing additional information regarding its trading in Interest Rate Management Instruments if the aggregate net cash flow for all Interest Rate Management Instruments exceeds $1 million during the quarter. In such instance, said System Company will disclose the net cash flow for each interest rate swap, and the net cash outflow or inflow for each floor or cap, respectively, that has been open at any time during such quarter. With respect to interest rate swaps, the net cash flow refers to the difference between the interest paid and received by each System Company during such quarter for that interest rate swap. With respect to any floor, the cash outflow refers to the sum of payments made by each System Company during such quarter under any floor sold by such System Company. With respect to any cap, the cash inflow refers to the sum of payments received by each System Company during such quarter under any cap purchased by such System Company; (c) Within forty-five days following the close of each fiscal quarter, each System Company will additionally disclose the market value for each Interest Rate Management Instrument that is outstanding at the close of the quarter, as of that closing date, if the aggregate market value of its Interest Rate Management Instruments increased or decreased by more than $1 million during the quarter. Said System Company will also disclose any gains or losses realized from the liquidation during such quarter in any position in any of its Interest Rate Management Instruments if such gains or losses in the aggregate exceed $1 million. If a report is required, it will include the proceeds and sale price constituting such gain or loss, and its carrying value, if any; and (d) Within forty-five days following the close of each fiscal quarter, each System Company will disclose the following information if the aggregate notional principal amount of its outstanding Interest Rate Management Instruments at the close of that quarter exceeds by $1 million or more the outstanding or notional principal amount of the underlying instrument: the date and reason for such condition; the identity of the Interest Rate Management Instrument causing such condition; and the date (i) the Interest Rate Management Instrument was terminated or the notional principal amount of such instrument was reduced or (ii) a new instrument related to the open Interest Rate Management Instrument was entered into, if applicable. If System Company enters into a new underlying instrument for any Interest Rate Management Instrument, it will also disclose the terms of the new underlying instrument. 12. Pro forma financial statements are not included in this filing because the System Companies believe it is difficult to reflect the impact of what could be numerous strategies designed to meet the System Companies' objectives outlined in this Application, namely management of the System Companies' existing and future portfolio of long-term and short-term debt, such that the System Companies achieve a balanced exposure to changes in interest rates as measured by a ratio of total variable rate debt to total debt and the resulting impact of System Companies' earnings, and management of the risks associated with the issuance of new short-term and long-term debt. 13. No associate company or affiliate of the System Companies has any material interest, directly or indirectly, in the proposed transactions. 14. Except in accordance with the Act, neither NU nor any subsidiary thereof (1) has acquired an ownership interest in an exempt wholesale generator ("EWG") or a foreign utility company ("FUCO") as defined in Sections 32 and 33 of the Act, or (2) now is or as a consequence of the transactions proposed herein have a right under, a service, sales or construction contract with an EWG or FUCO. None of the proceeds from the transactions proposed herein will be used by the System Companies to acquire any securities of, or any interest in, an EWG or FUCO. The NU System is in compliance with Rule 53(a), (b) and (c), as demonstrated by the following determinations: (i) NU's aggregate investment in EWGs and FUCOs (e.g. amounts invested in or committed to be invested in EWGs and FUCOs, for which there is recourse to NU) does not exceed 50 percent of NU system's consolidated retained earnings as reported for the four most recent quarterly periods on NU's Form 10-K and 10-Qs. At June 30, 1996, the ratio of such investment ($40 million) to such consolidated retained earnings ($1.0 billion) was 4.2 percent. (ii) Encoe Partners, Central Termica San Miguel de Tucuman, S.A. Ave Fenix and Plantas Eolicas, S. A. (NU's only EWGs or FUCOs at this time) (collectively, "EWGs/FUCOs") maintain books and records and prepare financial statements in accordance with Rule 53 (a)(2). Furthermore, NU has undertaken to provide the Commission access to such books and records and financial statements, as it may request. (iii) No employees of the NU system's public utility companies have rendered services to the EWGs/FUCOs. (iv) NU has submitted (1) a copy of each Form U-1 and Rule 24 certificates that have been filed with the Commission under Rule 53 and (b) copy of Item 9 of Form U5S and Exhibits G and H thereof to each state regulator having jurisdiction over the retail rates of the NU system public utility companies. (v) Neither NU nor any NU subsidiary has been subject of a bankruptcy or similar proceeding unless a plan of reorganization has been confirmed in such proceeding. In addition, NU's average consolidated retained earnings for the four most recent quarterly periods has not decreased by 10 percent or more from the average for the previous four quarterly periods. (vi) In the previous fiscal year, NU's operating losses attributable to its investment in the EWGs/FUCOs did not exceed 5 percent of NU's consolidated retained earnings. (b). Consideration for Proposed Transactions No consideration is to be given or received in connection with the proposed transactions except for the fees, commissions and expenses set forth in Section II, and amounts payable in accordance with the terms and conditions of Interest Rate Management Instrument's contract documents the same or substantially similar to that of the International Swap Dealers Association, Inc. Master Agreement filed as Exhibit B.1. hereto, and within the ranges specified in the description of Interest Rate Management Instruments set forth in Paragraph 4 above. II. FEES, COMMISSIONS AND EXPENSES 1. Except for the $2,000 fee payable to the Commission and as otherwise described herein, there are no fees, commissions or expenses other than legal fees, out-of-pocket expenses of any counterparty and intermediary and similar expenses to be paid or incurred, directly or indirectly in connection with the proposed transactions. 2. Based on NUSCO employee hours expended for Interest Rate Management Instrument transactions entered into in the past, including but not limited to the analysis, negotiation, documentation and closing of such contracts, it is estimated that future costs will not exceed $10,000 per transaction. In general it is believed that the actual costs may be less than $10,000, however, some margin is necessary for unanticipated transaction costs and/or for additional time and resource requirements needed to thoroughly understand newly fashioned and possibly more sophisticated transactions. Only actual costs of services incurred in connection with a specific Interest Rate Management Instrument transaction will be charged to the relevant System Company. The core of NU's accounting system is provided by a computer program known as the Management Information and Budgeting System ("MIBS"). MIBS controls (i)the processing of actual charges inputed from source systems such as payroll and purchasing, (ii) the database reconciliations to assure that all transactions are correct, (iii) the processing of allocations and System Company billings and (iv) the performance of all internal and external financial reporting. V. PROCEDURE 1. The System Companies respectfully request that the Commission's order herein be issued, subject to completion of this Application, with respect to NU, immediately, and with respect to the other System Companies, from time to time as soon as practicable after each individual System Company has filed with the Commission in this File all State approvals necessary to authorize its participation in the transactions described in this Application, with reservation of jurisdiction over the activities of the System Companies which have not completed the record for their State approvals. 2. The System Companies hereby waive a recommended decision by a hearing officer or other responsible officer of the Commission and consent that the Division of Investment Management may assist in the preparation of the Commission's finding and/or order and hereby requests that the Commission's order become effective subject to the conditions set forth above. VI. EXHIBITS AND FINANCIAL STATEMENTS The exhibits list of this Application/Declaration is hereby amended to add the following exhibit: B.2 Risk Management Program Policies and Practices for Interest Rate Management Instruments The following exhibit is filed herewith: F.1 Opinion of Counsel The following exhibit is deleted in its entirety: H. Proposed Form of Quarterly Report of Interest Rate Management Instruments. NORTHEAST UTILITIES THE CONNECTICUT LIGHT AND POWER COMPANY WESTERN MASSACHUSETTS ELECTRIC COMPANY PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE HOLYOKE WATER POWER COMPANY NORTH ATLANTIC ENERGY CORPORATION By: /s/David R. McHale Assistant Treasurer Date: November 8, 1996 EX-99 2 EXHIBIT TO AMENDMENT 2 TO FORM U-1 Exhibit B.2 Financial Risk Management Program Policies and Practices February 1996 Northeast Utilities Risk Management Program Policies and Practices Contents Section 1 SCOPE AND OBJECTIVES 1.1 Overview............................................. 4 1.2 Operational Risk, not Contractual Risk............... 4 1.3 Range of Risk........................................ 5 1.4 Objectives........................................... 5 Section 2 GOVERNANCE AND RESPONSIBILITIES 2.1 Northeast Utilities Board of Trustees................ 7 2.2 Subsidiary Board of Directors........................ 7 2.3 Risk Oversight Council............................... 8 2.4 Senior Management.................................... 9 2.5 Vice President and Treasurer......................... 10 2.6 Assistant Treasurer - Finance........................ 13 2.7 Assistant Treasurer - Treasury Operations............ 14 Section 3 EXPOSURE MANAGEMENT 3.1 Exposure Definition.................................. 15 3.2 Exposure Measurement................................. 15 3.3 Authorized Hedging Activities........................ 16 3.4 Limits............................................... 17 Section 4 CREDIT RISK MANAGEMENT 4.1 Credit Policies...................................... 19 4.2 Counterparty Selection............................... 21 4.3 Monitoring and Reporting............................. 22 4.4 Documentation........................................ 23 Section 5 MANAGEMENT REPORTING 5.1 Monitoring of Exposures and Hedge Positions.......... 25 5.2 Management Reporting................................. 25 5.3 Hedge Effectiveness and Performance.................. 27 Section 6 OPERATIONS AND PROCESSING 6.1 Trade Execution...................................... 28 6.2 Trade Confirmation................................... 29 6.3 Settlements and Mark-to-Market....................... 31 Section 7 ACCOUNTING AND DISCLOSURE 7.1 Accounting Policies.................................. 33 7.2 Disclosure........................................... 34 7.3 Auditing............................................. 34 Section 8 EXHIBITS Schedule A................................................ 37 Schedule B................................................ 38 Schedule C................................................ 39 Section 1 SCOPE AND OBJECTIVES 1.1 Overview These Risk Management Program Policies and Procedures (collectively Procedures) were developed by the NUSCO Treasury Department in response to the Retail Business Group s and Wholesale Marketing Group s needs to provide customers with flexible, competitive pricing structures, often in the form of long-term, fixed-price contracts. Although long-term, fixed-priced contracts meet customer needs, they subject the NU System to the risks associated with variably priced production costs. In the wholesale market segment, these costs are typically driven by marginal costs that are predominantly fuel- related, i.e., residual fuel oil and natural gas. 1.2 Operational Risk, Not Contractual Risk The scope of these Procedures is limited to the internal operational risks of the NU System, that is, the internal risk that the NU System manages for itself, including fuel, interest rate and foreign exchange risk. These Procedures do not address "third party contractual risk", that is, risk that the NU System manages for others, or the risk of credit default by the NU System s customers under long-term contracts. 1.3 Range of Risk The NU System s fuel hedging program was initiated early in 1994 and is expected to increase in size and scope over time to support the System s growing wholesale and retail marketing efforts. In addition, the NU System has been managing interest rate risk with derivatives since 1983, primarily through interest rate swaps and caps. These efforts are expected to escalate as the NU System seeks to manage costs more actively and effectively in a competitive utility environment. The NU System has had very limited involvement to date with managing foreign exchange exposures. However, as the international component of HEC s and Charter Oak Energy s business develops, the NU System may become subject to foreign exchange exposure. 1.4 Objectives The objectives of these Procedures are: 1.4.1 to manage selected business risks actively, in order to remain competitive in a new, deregulated, utility environment, 1.4.2 to reduce the NU System s earnings volatility that could, if risks were not actively managed, result from dramatic moves in the commodities and financial markets, 1.4.3 to facilitate the NU System s marketing efforts intended to gain and retain wholesale and retail customers, and to enable the company s marketing organizations to enter into new markets with varying risk profiles, and 1.4.4 to improve generating system utilization by increased system and off-system sales. Section 2 GOVERNANCE AND RESPONSIBILITIES 2.1 Northeast Utilities Board of Trustees The Northeast Utilities Board of Trustees (NU Board) has the ultimate responsibility and authority for risk management practices throughout the NU System. These Procedures, therefore, must be executed in accordance with any specific authorizations or restrictions adopted by the NU Board or any Committee of the NU Board, and any authority delegated by the NU Board or any Committee. 2.2 Subsidiary Boards of Directors Subject to any specific authorizations or restrictions adopted by the NU Board or any Committee of the Board, the respective Boards of Directors of CL&P, WMECO, PSNH, NAEC, NUSCO, and each other subsidiary of NU (collectively the Subsidiary Boards) have the ultimate responsibility for risk management practices for the respective subsidiary. These Procedures, therefore, must be executed in accordance with any specific authorizations or restrictions adopted by any Subsidiary Board and any authority delegated by a Subsidiary Board. 2.3 Risk Oversight Council 2.3.1 A Risk Oversight Council (the ROC or the Council) shall be established to assist in formulating policies, governance and review of these Procedures. The number of members of the Council shall be fixed from time to time by the Chief Executive Officer (CEO), and members shall be appointed by the CEO. Members shall include at a minimum the Vice President and Treasurer, and the Vice President of Wholesale Marketing. Other Council members are expected to be officers or senior staff drawn from the affected constituencies within the NU System. The Council shall establish its own internal working rules, including such matters as the frequency and conduct of meetings, quorum, voting rights, attendance by non-members, and substitutes and proxies for members. 2.3.2 Subject to any specific authorizations or restrictions adopted by the NU Board or any Committee of the Board, or by any Subsidiary Board, and except as may otherwise be provided by the CEO or as may be required by law, risk management policies adopted by the ROC shall be the policies of the NU System. It shall be the responsibility of the officers, employees, agents and representatives of the NU System and its subsidiaries to conduct their activities and to perform their responsibilities under these Procedures in accordance with any risk management policies adopted by the ROC. 2.4 Senior Management 2.4.1 Subject to and in accordance with sections 2.1 through 2.3, the Chief Financial Officer (CFO) is responsible for approving and overseeing the NU System s general risk management policies, methods, practices and procedures. The CFO will report on these policies to the CEO and to the NU Board or any Committee of the NU Board, and/or to the Subsidiary Boards, at such times and in such manners as each such Board or Committee shall request. 2.4.2 Unless the NU Board (or Committee designated by the Board for this purpose) otherwise requires, the CFO shall provide the Board no less frequently than annually with a report describing the current status of the Risk Management Program. 2.4.3 The CFO must also promptly notify the NU Board (or any designated Committee) regarding: a.) material adverse changes in the amount or kind of risk incurred by the NU System as a whole, b.) material proposed or actual changes in risk management policies, methods, practices or procedures, and c.) material breaches or violations of the NU System s risk management policies, methods, practices or procedures. 2.4.4 Both the CEO and the CFO shall be available as requested to advise the ROC and Vice President and Treasurer on request, and each shall be available to act whenever higher level exception authority is required. 2.5 Vice President and Treasurer 2.5.1 Subject to and in accordance with sections 2.1 through 2.4, the Vice President and Treasurer has the overall specific charge of the development and implementation of these Procedures and the NU System s risk management policies, methods, practices and procedures for operational risks within the scope specified in section 1.2. Accordingly, the Vice President and Treasurer, in consultation with the ROC, and in compliance with any policies adopted by the ROC, shall establish and, to the extent required or to the extent he/she deems appropriate, shall seek senior management approval for risk management policies regarding : a.) risk tolerance levels, b.) underlying exposures to be hedged, c.) exposure/hedge ratio, d.) hedging instruments, e.) trading limits, f.) tenors, g.) management of credit risk, and h.) financial counterparties. 2.5.2 In accordance with these Procedures, the Vice President and Treasurer will oversee and authorize execution of risk management transactions by the Finance Department referred to in section 2.6. Accordingly, the Vice President will authorize: a.) a list of authorized trade personnel within the Finance Department permitted to execute risk management transactions on the behalf of the NU System, b.) a list of authorized financial instruments and underlying exposure to be used when executing a transaction (hedging instruments), c.) a list of approved counterparties in which NU may conduct business, and d.) any parameters under which the Finance Department may execute transactions on the authority of the Assistant- Treasurer Finance, without transaction-specific authorization by the Vice President and Treasurer. 2.5.3 Any risk management transactions that do not comply with authorizations made in accordance with the requirements of section 2.5.2, and yet which are nevertheless consistent with these Procedures, may be executed only if specifically authorized by the Vice President and Treasurer. 2.5.4 In the absence of authorized personnel in the Finance Department, the Vice President and Treasurer may execute risk management transactions that are otherwise consistent with these procedures. 2.5.5 The Vice President and Treasurer is responsible for directing the risk management activities of the Assistant Treasurer - Finance and the Assistant Treasurer - Treasury Operations set forth in sections 2.6 and sections 2.7. 2.6 Assistant Treasurer - Finance 2.6.1 The Assistant Treasurer - Finance reports directly to the Vice President and Treasurer and directs the activities of the staff of the Finance Department. The Assistant Treasurer- Finance is principally responsible for directing the risk management assignments of the Finance Department, primarily exposure aggregation and management, credit risk management, reporting, transaction execution, and accounting compliance. Responsibilities of the Finance Department are elaborated in Sections 3-7. 2.6.2 The Assistant Treasurer may execute trades with counterparties in accordance with authority granted, and in compliance with parameters established by, the Vice President and Treasurer. Under no circumstances is he/she allowed both to execute and to authorize the same trade. 2.6.3 Trade tickets executed by trade personnel other than the Assistant Treasurer - Finance may be authorized by the Assistant Treasurer - Finance. 2.6.4 The Assistant Treasurer - Finance is responsible for ensuring that personnel in the Finance Department involved in risk management activities are sufficiently trained and knowledgeable of current risk management practices and these Procedures. 2.7 Assistant Treasurer - Treasury Operations 2.7.1 The Assistant Treasurer - Treasury Operations reports directly to the Vice President and Treasurer and directs the activities of the Cash Management Department. The Assistant Treasurer- Treasury Operations is principally responsible for directing the risk management assignments of the Cash Management Department, primarily operations and processing and management reporting. Responsibilities of the Cash Management Department are elaborated in Sections 3-7. 2.7.2 In accordance with section 6.2, the Assistant Treasurer - Treasury Operations may authorize confirmation schedules received in the Cash Management Department from trade counterparties. 2.7.3 The Assistant Treasurer - treasury Operations is responsible for ensuring that personnel in the Cash Management Department involved in risk management activities are sufficiently trained and knowledgeable of current risk management practives and these Procedures. Section 3 EXPOSURE MANAGEMENT 3.1 Exposure Definition 3.1.1 The Finance Department is responsible for working with NU business units to define specific sources of risks and to aggregate those risks at a corporate level in order to determine financial statement and economic impacts to the NU System. Currently, these risks include: a.) Interest rate risk - originated through the Treasury Department, b.) Fuel price risk - originated through the Wholesale and Retail Marketing Groups, and c.) Foreign currency risk - originated primarily through Charter Oak Energy Company. 3.2 Exposure Measurement 3.2.1 Individual business units are responsible for the development of exposure measurement methodologies and the resulting quantification of exposures. The Finance Department is responsible for working with the business units to understand, develop and validate exposure measurement methodologies and exposure levels. 3.2.2 Exposure measurement methodologies, including sources of input, will be documented by the individual business units and be subject to periodic review and approval by the Vice President and Treasurer. 3.2.3 Exposure levels will be measured and reported by the individual business units and reported to the Finance Department on at least a quarterly basis. The Finance Department will be responsible for reporting these exposures to the Vice President and Treasurer, and to manage exposures in accordance with the company s risk management strategies. 3.3 Authorized Hedging Activities 3.3.1 Under the direction of the Vice President and Treasurer and in accordance with these Procedures, the Finance Department will conduct various risk management activities to manage the financial exposures of the NU System. 3.3.2 The Finance Department will maintain, adhere to, and notify the Cash Management Department as to the list of authorized: a.) trading personnel, b.) hedging instruments, c.) approved counterparties, and d.) parameters set by the Vice President and Treasurer pursuant to section 2.5.2. 3.3.3 The Finance Department is responsible for recommending and seeking approval from the Vice President and Treasurer, as necessary, for any changes in the authorizations described in section 3.3.2. 3.3.4 The Finance Department is responsible for notifying approved counterparties of the authorized trading personnel and any restrictions or limitations on their activities. The initial list of authorized NU trading personnel is attached as Schedule A. 3.4 Limits 3.4.1 In conducting hedging activities, the Finance Department will adhere to, and notify Cash Management of pre-established trading limits authorized by the Vice President and Treasurer, either on his/her own authority or in accordance with limitations established by the NU Board, the ROC, or otherwise pursuant to these Procedures. These limits may include limits for each category of business exposure in relationship to the maximum or minimum extent of such exposure(s) to be actively hedged. Section 4 CREDIT RISK MANAGEMENT 4.1 Credit Policies 4.1.1 In conducting risk management activities pursuant to these Procedures, the Finance Department will maintain, adhere to, and notify Cash Management of pre-established credit risk policies which relate to NU s financial counterparties. Established policies relating to credit risk management will include: a.) selection criteria for counterparties, b.) any limitations on the number or value of transactions with any one or more counterparties, and c.) cash settlement and mark-to-market terms and requirements. 4.1.2 Periodic cash settlements of outstanding hedging transactions will take place in accordance with the contractual payment terms negotiated by the Finance Department and documented in the written agreements between the NU System and the respective authorized counterparties (the Master Swap Agreements). Payment will be made, and payment terms will be enforced, by Cash Management. 4.1.3 Periodic mark-to-market of outstanding hedging transactions will take place in accordance with the contractual mark-to- market terms negotiated by the Finance Department and documented in the Master Swap Agreements. Mark-to-market terms will be enforced by the Cash Management Department. 4.1.4 Counterparties will be subject to collateral requirements based on mark-to-market positions and individual counterparty credit ratings approved by the Finance Department and documented in the Master Swap Agreements. 4.1.5 To further minimize credit risk, the Finance Department is responsible for monitoring the credit quality of counterparties and for maintaining counterparties of high credit quality, with sufficiently diverse financial and business profiles to diversify the risk of default. 4.1.6 The Finance Department will be responsible for periodic stress-testing of credit exposures given certain market conditions and parameters and will report findings to the Vice President and Treasurer. 4.2 Counterparty Selection 4.2.1 The Finance Department will maintain, adhere to, and notify Cash Management of the list of approved counterparties. The Finance Department will recommend and seek approval from the Vice President and Treasurer, as necessary, for any change in approved counterparties. Policies relating to counterparty selection will include: a.) credit ratings, b.) counterparty expertise as it relates to specific business exposures, c.) acceptance of Master Swap Agreement terms and conditions, d.) corporate relationship concerns, and e.) creditworthiness of a counterparty based on the credit ratings of the institution as defined by Moody s Investor Service and Standard & Poor s. Minimum credit rating levels will be established by the ROC, or, if the ROC does not establish minimum credit rating levels, by the Vice President and Treasurer. 4.2.2 Any changes in counterparty credit ratings will be reported to the Vice President and Treasurer by the Finance Department. 4.2.3 The Finance Department will require all financial counterparties to enter into Master Swap Agreements with the appropriate NU subsidiary, and will conduct business in accordance with the terms and conditions of the respective Master Swap Agreements. 4.3 Monitoring and Reporting 4.3.1 The Cash Management Department will be responsible for monitoring and reporting credit positions, at least quarterly, to the Vice President and Treasurer. Information conveyed will include: a.) conduct of business with approved counterparties, and b.) aggregate counterparty exposures compared to credit limits. 4.3.2. The Cash Management Department will report immediately to the Vice President and Treasurer any exceptions to the Master Swap Agreement terms and conditions. 4.4 Documentation 4.4.1 The terms and conditions of the Master Swap Agreements will be negotiated by the Finance Department, which shall assure that no transactions take place with a counterparty until an executed Master Swap Agreement complying with the requirements of these Procedures is in place with that counterparty. 4.4.2 In order to minimize credit risk and ensure proper controls, Master Swap Agreements will include specific language relating to: a.) definition of terms, b.) calculation of prices/amounts, c.) payments and settlements, d.) collateral requirements, e.) covenants, f.) material adverse change, g.) disposition of collateral, h.) representations and warranties, i.) events of default, j.) early and accelerated termination, and k.) swap and option confirmation schedules. 4.4.3 Legal counsel will be sought by the Finance Department to approve all terms and conditions, opinions, certificates, etc., agreed to in the Master Swap Agreements. 4.4.4 A library of all Counterparty Master Swap Agreements including Schedules, Amendments, etc. will be established by the Finance Department. They will ensure access to these documents by providing the Cash Management Department, Internal Audit Department, Accounting, Department, and the Legal Department with copies of such material. Section 5 MANAGEMENT REPORTING 5.1 Monitoring of Exposures and Hedge Positions 5.1.1 The Finance Department will be responsible for the daily monitoring of the hedge portfolio and will report those activities to the Vice President and Treasurer and the Assistant Treasurer - Finance on at least a monthly basis or as sudden and significant changes to hedged positions occur. These activities will include: a.) projections of cash settlement for all outstanding hedge transactions, b.) mark-to-market positions of all hedge contracts, c.) market values and trends for underlying commodities, interest rates, currencies, and d.) counterparty credit limits and credit ratings. 5.2 Management Reporting 5.2.1 The Finance Department will be responsible for reporting exposure and hedge positions to senior management, the Vice President and Treasurer and the Council through a periodic management report to be issued on at least a quarterly basis. This report will include the following information: a.) business exposures, as determined by business units and reviewed by the Finance Department, b.) outstanding hedge contracts, as aggregated by the Finance Department and verified by the Cash Management Department, c.) comparison of exposures to hedge positions relative to established hedge limits, as calculated by the Finance Department and verified by the Cash Management Department, d.) market values and trends for underlying commodities, interest rates, currencies or indices based on publicly available market information or counterparty quotes and aggregated by the Finance Department, e.) current and historical cash settlement positions aggregated by the Finance Department and verified by the Cash Management Department, f.) current and historical mark-to-market positions aggregated by the Finance Department and verified by the Cash Management Department, and g.) counterparty credit limits and exposures, aggregated by the Finance Department and verified by the Cash Management Department. 5.2.2 Exception reporting will be prepared by the Cash Management Department and distributed to the Vice President and Treasurer, Assistant Treasurer - Finance, and Assistant Treasurer - Treasury Operations, as necessary. 5.3 Hedge Effectiveness and Performance 5.3.1 The Finance Department will be responsible for measuring the effectiveness and performance of hedging activities, and will report on the results of its evaluations to senior management, the Vice President and Treasurer and the Council on at least an annual basis. 5.3.2 Effectiveness and performance of the program will be based the following criteria: a.) original program objectives as approved by senior management, b.) actual risk reduction, c.) effectiveness of hedge positions relative to underlying exposures, and d.) compliance with these Procedures. Section 6 OPERATIONS AND PROCESSING 6.1 Trade Execution 6.1.1 In accordance with these Procedures, and under the immediate direction of the Vice President and Treasurer, the Finance Department as directed by the Assistant Treasurer - Finance will be responsible for the execution of all hedge transactions. This responsibility includes compliance with: a.) trading and credit limits, b.) approved hedge instruments, c.) approved hedge tenors, d.) approved commodities, interest rates, currencies or indices, e.) approved counterparties, and f.) Master Swap Agreement documentation. 6.1.2 In addition to the policies and procedures identified in section 6.1.1, the Finance Department shall consider the following factors in executing hedge transactions: a.) recent price indications and price projections, b.) evaluations of the ability of potential counterparties to meet the quantity and/or term of proposed transactions, and c.) current capabilities of various counterparties, recent experience with various counterparties, and diversification of counterparties. 6.1.3 The Finance Department will be responsible for notifying the Vice President and Treasurer and the Cash Management Department of new hedge transactions through the presentation of a trade ticket. All trade tickets will be signed by authorized trading personnel and signed for approval by either the Vice President and Treasurer or the Assistant Treasurer - Finance, in accordance with the transaction authorization requirements of these Procedures. 6.2 Trade Confirmation 6.2.1 All hedging transactions will be confirmed by the Cash Management Department, independent of the Finance Department. The confirmation process will include: a.) receipt of a trade ticket from the Finance Department, signed and approved by the Vice President and Treasurer or the Assistant Treasurer - Finance, b.) independent verification of trade details by the Cash Management Department through telephone conversations with counterparties back offices, c.) comparison of trade terms with approved policies and procedures, including items listed in section 6.1.1, d.) recording of trade ticket in computer database, e.) receipt of standard confirmation schedule signed by counterparty, f.) verification signature of Assistant Treasurer - Treasury Operations or Cash Management Supervisor on the confirmation schedule to signify agreement of trade terms by NU, and g.) maintenance of a library containing trade tickets, confirmation schedules, and other pertinent trade documents. 6.2.2 All exception reporting relating to approved policies and procedures will be the responsibility of the Cash Management Department. Exceptions will be reported directly to the Vice President and Treasurer and Assistant Treasurer - Finance. 6.3 Settlements and Mark-to-Market 6.3.1 The Cash Management Department will be responsible for the settlement of all hedging transactions in accordance with payment provisions of the Master Swap Agreement. This process may include: a.) payment of monies to counterparties via electronic funds transfer to pre-established and approved bank accounts, and b.) billing of monies to counterparties through the Sundry Billing Department through the use of pre-established and approved NU System invoices. 6.3.2 The Cash Management Department will be responsible for : a.) the mark-to-market of all outstanding hedge transactions in accordance with mark-to-market provisions of the Master Swap Agreements, b.) comparing mark-to-market positions, by counterparty, to counterparties and NU System s credit limits, and if necessary comply with the collateral provisions of the Master Swap Agreement, and c.) reporting of all settlements and mark-to-market positions of the NU System s hedge transactions on at least a monthly basis via a management report aggregated by the Finance Department. 6.3.3 The Finance Department will independently calculate settlements and mark-to-market positions and work with the Cash Management Department to confirm and reconcile all payments and positions. Section 7 ACCOUNTING AND DISCLOSURE 7.1 Accounting Policies 7.1.1 The Finance Department is responsible for maintaining current knowledge of applicable accounting, tax, SEC and other applicable standards for risk management transactions. Accordingly, the Finance Department will work with the Legal, Accounting and Tax Departments to : a.) interpret existing criteria for risk management transactions, b.) maintain clear written accounting policies for fundamental transactions, c.) provide advice and recommendations, as needed, to the ROC, the CFO, the Vice President and Treasurer, and the Vice President and Controller on accounting, tax, SEC and other matters related to risk management activities and provide updates on new standards as necessary, d.) communicate hedge account criteria to independent business units to ensure proper business decisions can be made relating to the incidence of risk. 7.2 Disclosure 7.2.1 The Finance Department will also be responsible for working with the Accounting Department to: a.) understand and ensure proper financial disclosure of derivative transactions and inform the Vice President and Treasurer and Vice President and Controller of disclosure polices, and b.) monitor changes in disclosure requirements as proposed by regulators including the Financial Accounting Standards Board, the Securities and Exchange Commission and the Internal Revenue Service. 7.3 Auditing 7.3.1 The NU System s risk management program will be subject to an annual audit by NUSCO s Internal Audit Department and by the NU System s external auditors to ensure compliance with these Procedures. Items subject to audit will include: a.) compliance with program goals and objectives, including these Procedures, b.) compliance with trading and credit limits, c.) segregation of duties, and d.) compliance with accounting and disclosure requirements. 7.3.2 The NUSCO Internal Audit Department will report the findings of its audits to the NU Board and/or the Audit Committee of the NU Board, to the CEO, CFO, Vice President and Treasurer and Vice President and Controller, and to the Council. Section 8 Exhibits SCHEDULE A Appointment of Authorized Trading Personnel SCHEDULE B Authorized Hedging Instruments SCHEDULE C Approved Counterparties SCHEDULE A - Appointment of Authorized Trading Personnel The following employees of Northeast Utilities Service Company are authorized to execute risk management transactions on behalf of the member companies of the Northeast Utilities System pursuant to, and in compliance with, the Northeast Utilities System s Risk Management Program Policies and Practices (February 1996). Signature Name Title John B. Keane Vice President & Treasurer David R. McHale Assistant Treasurer-Finance Neil S. Herzig Senior Financial Analyst SCHEDULE B - Authorized Hedging Instruments Fuel Floating to fixed swap Underlying Exposure Oil - 1% sulfur residual fuel oil, New York Harbor Natural Gas - Henry Hub Interest Rate Cap Underlying Exposure LIBOR JJ Kenny SCHEDULE C - Approved Counterparties Fuel Morgan Stanley Capital Group, Inc. Barclays Bank PLC Citibank, N.A. AIG Trading Corporation Philbro Division of Solomon Inc. Interest Rate Barclays Bank PLC First Chicago Fleet Bank Credit Lyonnais Citibank, N.A. EX-5 3 OPINION OF COUNSEL Exhibit F.1 November 8, 1996 Securities and Exchange Commission 450 Fifth Street, N.W. Judiciary Plaza Washington, D.C. 20549 Re: Northeast Utilities The Connecticut Light and Power Company Western Massachusetts Electric Company Holyoke Water Power Company Public Service Company of New Hampshire North Atlantic Energy Corporation File No. 70-8895 Ladies and Gentlemen: I am Assistant General Counsel of Northeast Utilities Service Company ("NUSCO"), a service company affiliate of Northeast Utilities ("NU"). I have acted as counsel to NU, The Connecticut Light and Power Company ("CL&P"), Western Massachusetts Electric Company ("WMECO"), Holyoke Water Power Company ("HWP"), Public Service Company of New Hampshire ("PSNH") and North Atlantic Energy Corporation ("NAEC") (collectively, the "Applicants") in connection with the transactions contemplated by the application/declaration, as amended, in the above referenced file (the "Application"). This opinion is given to you with respect to such transactions pursuant to your Instructions as to Exhibits to applications and declarations filed on Form U-1. Except as otherwise defined herein, terms used herein shall have the meanings given them in the Application. In connection with this opinion, I have reviewed or caused to be reviewed the Application and the exhibits thereto, the Applicants' charter documents, as amended to the date of this opinion, the proceedings of their shareholders and boards of directors to date and such other papers, documents and records, and have made or caused to be made such examination of law, as I deemed relevant and necessary in order to give this opinion. I have assumed that in respect of the Application an appropriate order of the Commission under the Public Utility Holding Company Act of 1935 will be issued and all actions of the Applicants will be in conformity therewith. The opinions set forth herein are qualified in their entirety as follows: (a) every opinion rendered herein is expressly subject to the consummation of such transactions in accordance with the Application using documents substantially similar to that filed with the Application and in accordance with such resolutions of the Board of Trustees or the Boards of Directors of the other Applicants as may hereinafter be enacted to authorize such transactions; (b) no opinion is expressed as to any laws other than the federal laws of the United States and the laws of the States of Connecticut and New Hampshire and of the Commonwealth of Massachusetts; (c) insofar as any opinion relates to the Declaration of Trust of NU or the Certificate of Incorporation or Bylaws of any other Applicant, I have assumed that the Declaration of Trust and the Certificates and Bylaws will not be amended between now and the time the transactions contemplated by the Application are consummated; and (d) no opinion is expressed as to the securities laws of any state. Based on and subject to the foregoing, I am of the opinion that: 1. All state laws applicable to each of the transactions for which the Commission's approval is sought will have been complied with at the time each transaction is consummated. 2. NU, WMECO and HWP is each validly organized and duly existing under the laws of the Commonwealth of Massachusetts; CL&P is validly organized and duly existing under the laws of the State of Connecticut; and PSNH and NAEC is each validly organized and duly existing under the laws of the State of New Hampshire. 3. The Interest Rate Management Instruments, when executed and delivered, will be the valid and binding obligations of such Applicants in accordance with their respective terms. 4. The consummation of the transactions for which the Commission's approval is sought will not violate the legal rights of the holders of any securities issued by any of the Applicants or any associate company of such Applicants. I hereby consent to the use of this opinion in connection with the filing of the Application. I am a member of the Bar of the State of New York. As to matters involving the laws of other jurisdictions, I have made a study of such laws and consulted with lawyers employed by NUSCO who are admitted to the Bars of such other jurisdictions. Very truly yours, /s/Jeffrey C. Miller Assistant General Counsel Northeast Utilities Service Company -----END PRIVACY-ENHANCED MESSAGE-----