-----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, WkRk9gorAD46xg5al+O2CdjitgeAIuZaYH2pla2Mf4t9TQ0/NWNRPdLa7MPnCaze OJgYHtO5xefTCWhkxdu5fg== 0000906602-97-000096.txt : 19970528 0000906602-97-000096.hdr.sgml : 19970528 ACCESSION NUMBER: 0000906602-97-000096 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970527 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHEAST UTILITIES SYSTEM 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: 070-08875 FILM NUMBER: 97614569 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 U-1 AMENDMENT FILING FILE NO. 70-8875 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 4 (AMENDMENT NO. 6) TO FORM U-1 APPLICATION/DECLARATION WITH RESPECT TO (1) PROPOSED REVOLVING CREDIT FACILITY FOR NORTHEAST UTILITIES ("NU"), THE CONNECTICUT LIGHT AND POWER COMPANY ("CL&P") AND WESTERN MASSACHUSETTS ELECTRIC COMPANY ("WMECO") AND (2) INCREASES AND EXTENSIONS OF SHORT-TERM BORROWING LIMITS OF NU, CL&P, WMECO, PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, HOLYOKE WATER POWER COMPANY AND NORTH ATLANTIC ENERGY CORPORATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 Northeast Utilities The Connecticut Light Western Massachusetts Electric Company and Power Company 174 Brush Hill Avenue 107 Selden Street West Springfield, MA 01090-0010 Berlin, CT 06037 Holyoke Water Power Company Public Service Company of New Hampshire Canal Street North Atlantic Energy Corporation Holyoke, MA 01040 1000 Elm Street Manchester, NH 03015 (Name of companies filing this statement and addresses of principal executive offices) NORTHEAST UTILITIES (Name of top registered holding company) Robert P. Wax, Esq. Vice President, Secretary and 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 Jeffrey C. Miller, Esq. David R. McHale Richard C. MacKenzie, Esq. Assistant General Assistant Treasurer - Day, Berry & Howard Counsel Finance CityPlace I Northeast Utilities Northeast Utilities Hartford, CT 06103-3499 Service Company Service Company 107 Selden Street 107 Selden Street Berlin, CT 06037 Berlin, CT 06037 1. The Applicants amend the application/declaration in this proceeding to substitute NAEC's March 31, 1997 financial statements, which are now available, for its December 31, 1996 financial statements and to add as exhibits the final versions of the First Amendment and Waiver and the Collateral Agency Agreement, which sets forth the duties and powers of the collateral agent for the Lenders under the Facility. In addition, the following exhibits and financial statements are filed herewith: (a) Exhibits *B.4(a) First Amendment and Waiver - Execution Copy *B.8 Collateral Agency Agreement - Execution Copy D.8 Certified copy of the Decision of the Connecticut Department of Public Utility Control approving the collateralization of the Facility. *D.10 Certified copy of the Order of the Massachusetts Department of Public Utilities approving the collateralization of the Facility. F.2 Opinion of Counsel. G.1 Financial Data Schedule for NAEC as of March 31, 1997. K.2 Schedule of Fees, Commissions and Expenses related to the matters covered by Post-Effective Amendment No. 2. * To be filed by amendment. (b) Financial Statements 1. North Atlantic Energy Corporation 1.1 Balance Sheet, per books and pro forma as of March 31, 1997. 1.2 Statement of Income, per books and pro forma, for 3 months ended March 31, 1997 and capital structure, per books and pro forma, as of March 31, 1997. 2. The Applicants believe that they now have filed all exhibits and financial statements necessary to enable the Commission to issue an order with respect to the transactions (the "Transactions") described in Post-Effective Amendment No. 2 (Amendment No. 4) except for Exhibits B.4(a) and B.8, the final versions of the First Amendment and Waiver and the Collateral Agency Agreement, respectively, and Exhibit D.10, the Order of the Massachusetts Department of Public Utilities approving the collateralization of WMECO's obligations under the Facility. The Applicants expect to file Exhibits B.4(a), B.8 and D.10 in the next few days. Accordingly, the Applicants respectively request that, upon receipt of Exhibits B.4(a), B.8 and D.10, the Commission promptly issue an order approving the Transactions. SIGNATURES Pursuant to the requirements of the Public Utility Holding Company Act of 1935, as amended, the undersigned have duly caused this Amendment to be signed on behalf of each of them by the undersigned thereunto duly authorized. Date: May 27, 1997 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: Day, Berry & Howard CityPlace I Hartford, Connecticut 06103-3499 By: /s/ Richard C. MacKenzie A Partner Exhibit D.8 STATE OF CONNECTICUT DEPARTMENT OF PUBLIC UTILITY CONTROL TEN FRANKLIN SQUARE NEW BRITAIN, CT 06051 DOCKET NO. 97-03-23 APPLICATION OF THE CONNECTICUT LIGHT AND POWER COMPANY TO ISSUE FIRST AND REFUNDING MORTGAGE BONDS May 14, 1997 By the following Commissioners: Thomas M. Benedict Reginald J. Smith Glenn Arthur DECISION TABLE OF CONTENTS I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 A. SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 B. CONDUCT OF THE PROCEEDING . . . . . . . . . . . . . . . . . . . .1 C. PARTIES TO THE PROCEEDING . . . . . . . . . . . . . . . . . . . .1 D. APPLICANT'S PROPOSAL. . . . . . . . . . . . . . . . . . . . . . .2 1. New Money Bonds . . . . . . . . . . . . . . . . . . . . .2 2. Collateral Bonds. . . . . . . . . . . . . . . . . . . . .3 3. Securities and Exchange Commission Jurisdiction . . . . .4 4. Financial and Credit Rating Issues. . . . . . . . . . . .5 III. DEPARTMENT ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . 12 IV. FINDINGS OF FACT . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 V. CONCLUSION AND ORDERS. . . . . . . . . . . . . . . . . . . . . . . . . 16 A. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 B. ORDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 DECISION I. INTRODUCTION A. SUMMARY By this Decision, the Department of Public Utility Control approves The Connecticut Light and Power Company's request to issue and sell first and refunding mortgage bonds in a total outstanding amount not to exceed $430 million. The Company may proceed with the issuance of the Collateral Bonds at this time. Final approval of the New Money Bonds will come when the terms are finalized. This will be done though a reopened hearing. The Department's review considered the special circumstances of the Company and the best rate and terms that could be obtained under those circumstances. B. CONDUCT OF THE PROCEEDING Pursuant to
16-43 of the General Statutes of Connecticut (Conn. Gen. Stat.) and by initial application filed on March 21, 1997 (Application), The Connecticut Light and Power Company (CL&P) requested approval from the Department of Public Utility Control (Department) to issue first and refunding mortgage bonds. After preliminary review of the Application, the Department found the Application to be incomplete, lacking key information (i.e., specific information such as the rates, terms and conditions of the proposed bond issuance) for the Department to proceed in a timely manner. By letter dated April 3, 1997, the Department acknowledged receipt of CL&P's initial Application and requested additional data and information in order to review the initial Application in a timely fashion. In the same letter, the Company was notified that for purposes of Conn. Gen. Stat
16-43, the date of the application would be the date of receipt by the Department of the requested information. The requested information was received by the Department on April 14, 1997. By Notice of Hearing dated April 17, 1997, the Department initiated the proceeding and subsequently issued interrogatories and conducted a public hearing on April 29, 1997, at its offices, Ten Franklin Square, New Britain, Connecticut. The public hearing was continued to May 5, 1997, at which time it was closed. A draft Decision was issued on May 7, 1997, and all parties were given an opportunity to provide written exceptions to and oral arguments on the draft Decision. C. PARTIES TO THE PROCEEDING The Department recognized The Connecticut Light and Power Company, P.O. Box 270, Hartford, Connecticut 06141-0270 and the Office of Consumer Counsel (OCC), Ten Franklin Square, New Britain, Connecticut 06051 as parties to the proceeding. D. APPLICANT'S PROPOSAL The Company requests approval to issue and sell first and refunding mortgage bonds (Bonds) during the period beginning April 21, 1997, through June 30, 1997, in amounts as follows: (i) up to $200 million in principal amount to be used for new money purposes (New Money Bonds) generally for the repayment of Short-Term borrowings; (ii) up to $313.75 million in principal amount to secure and repay borrowings under a revolving credit agreement (Collateral Bonds), plus (iii) the aggregate principal amount of the Bonds (i.e., New Money Bonds and Collateral Bonds) in total would not exceed $430 million issued and outstanding, at any one time. Application, p. 1. The Bonds issued would be first mortgage bonds providing the holder with the benefit of a first mortgage lien on substantially all of the Company's physical property and franchises including the generating substations (but not the four Yankee nuclear plants), its transmission and distribution facilities pari passu (i.e., side by side) with other outstanding first mortgage bonds. In the case of the Collateral Bonds, this first mortgage lien will be held by the Company's banks. Application, Exhibit A, p. 4. Responses to Data Requests EL-DR-I and EL-DR-2 provide, respectively, a summary of the terms and conditions of the Bonds (i.e., New Money Bonds and Collateral Bonds) and a schematic depicting the relationship between the proposed issuances of bonds. 1. New Money Bonds The intended use of the $200 million proceeds from the New Money Bonds is for general working capital purposes and to repay previous Short-Term borrowings such as bank loans, commercial paper and NU system money pool borrowings (Short-Term Borrowings). These Short-Term Borrowings were incurred to finance the Company's maturing debt, sinking fund requirements, working capital purposes, and costs associated with the Millstone nuclear outages. Exhibit B.6 of the Application presents an estimate of CL&P's forecasted requirements for the New Money Bonds and shows that CL&P will require $132 million to meet its external financing requirements over the period January 1, 1997, through June 30, 1997. These funds will be used to finance CL&P's construction expenditures ($73 M); Nuclear Fuel Trust ($2 M); Maturities and Sinking Funds ($199 M), and Short-Term Debt/Cash ($109 M). Application, Exhibit A, pp. 2-3; Exhibit B.6; Response to Data Request EL-DR-1, p. 2. Exhibit B.1 of the Application sets out the terms of each series of the Bonds to be issued. The New Money Bonds would be sold either in a public offering, through direct negotiations with underwriters, or through private placement, depending on which option is available at the time of the sale. At this time, CL&P is eligible to use the SEC's Form S-3 registration and prefers this method. Should this option not be available at the time of the sale, it would proceed with a private placement. Under this scenario, the Company would negotiate the terms and conditions (i.e., price and interest rate) with institutional investors through an investment banking firm. Regardless of which placement scenario is selected, CL&P indicates that negotiation for the terms is more favorable than a sale under a competitive bid scenario because of adverse publicity regarding the Company's operation of its nuclear plants. Application, Exhibit A, p. 6. The New Money Bonds will be identified as First and Refunding Mortgage Bonds and will have a term of not more than five years. The terms and conditions of the New Money Bonds will be determined through negotiation. Application, Exhibit A, pp. 7-8. The effective interest rate CL&P expects to pay on the New Money Bonds is 8.09% as a 3-year issue and 8.22% as a 5-year issue. Late Filed Exhibit No. 2. If the Company remains investment grade, the New Money Bonds will be issued in a public offering utilizing SEC Form S-3. Should the Company be downgraded, it will consider issuing these bonds under SEC Form S-I. If this option is too costly, it would issue the New Money Bonds through private placement. At the time of the issuance of the New Money Bonds, the Company would request a reopening of this Docket and special meeting to approve the specific price and terms of these bonds. Application, Exhibit A, pp. 10-12. 2. Collateral Bonds On November 21, 1996, the Company entered into a $313.75 million dollar, three-year revolving credit agreement (Revolving Credit Agreement) with its banks. At the time of these negotiations, the Revolving Credit Agreement was unsecured and according to the Agreement, CL&P could borrow up to the entire $313.75 million at variable interest rates based upon numerous factors. Application, Exhibit A, p. 3. The original purpose of the Revolving Credit Agreement was to use the borrowings for general corporate purposes and to provide funds to restore the Millstone plants to operation and pay for replacement power. Response to Data Request EL-DR-1, p. 1. Additionally, since the terms and conditions of the Revolving Credit Agreement have maturity of less than one year, Department approval of this agreement was not required. Response to Data Request EL-DR-6. At this time, CL&P finds it will not be able to meet several financial covenants, mainly its Interest Coverage Ratio, required by the Revolving Credit Agreement previously negotiated, primarily as a result of the increased costs related to the Millstone nuclear outages. Response to Interrogatory EL-1. CL&P has worked with its banks{1} in an effort to address their concerns regarding the Revolving Credit Agreement in order to continue access to it, as it is a crucial element to maintaining its financial flexibility and meet its working capital needs at this difficult time. To continue the Revolving Credit Agreement, the Banks require that they be issued first mortgage bonds as security. As a result of what transpired with the Banks, CL&P seeks to issue $313.75 million dollars in first mortgage bonds (i.e., Collateral Bonds) to "cover" the Banks request for additional security on the Revolving Credit Agreement. Additionally, because of the Company's current financial condition, the Banks are only willing to amend the Revolving Credit Agreement on the condition that they receive first mortgage bonds as security. Application, Exhibit A, pp. 4-5. The Collateral Bonds will be issued directly to the Banks through Citibank, N.A., as collateral agent. The terms and conditions of the Collateral Bonds will be negotiated between the Company and the Banks prior to issue. Application, Exhibit A, p. 7. The Collateral Bonds will be identified as First and Refunding Mortgage Collateral Bonds and will have a term of not more than three years. The anticipated terms will reflect the terms and conditions of the underlying credit obligation. These bonds will bear interest sufficient to pay all interest on the Revolving Credit Agreement and associated fees. Application, Exhibit A, pp. 7-8. The Collateral Bonds will never bear interest in excess of 11.5%. Supplemental Testimony, p. 1. CL&P expects to pay an effective interest rate (i.e., all-in costs) of 7.313%, with its split rating, using the Federal Funds rate as benchmark on the Collateral Bonds. Late Filed Exhibit No.2, and CL&P Written Exceptions, p. 3. Since the Collateral Bonds are issued as a security for the repayment of credit borrowings to the Banks, these issuances will not require a registration statement or a private placement memorandum. Application, Exhibit A, p. 12. The Company requested the opportunity to issue the Collateral Bonds to its banks without further reopening of this docket and a special meeting to approve the price and terms thereof as these bonds will be issued as security on the Company's Revolving Credit Agreement. Since the terms of the Collateral Bonds will coincide with the indebtedness incurred as a result of the Revolving Credit Agreement, the Company believes the information provided in this Application is sufficient. Application, Exhibit A, pp. 13-15. 3. Securities and Exchange Commission Jurisdiction According to the Company, the Securities and Exchange Commission (SEC) has jurisdiction over the issuance and sale of the Bonds. Under Rule 52 of the Public Utility Holding Company Act of 1935 (1935 Act) no SEC approval is required as long as CL&P gains the Department's approval to issue and sell the Bonds. As long as the Company remains investment grade, it is eligible to use SEC Form S-3 under Rule 415 of The Securities Act of 1935. CL&P will use a basic prospectus as filed in Exhibit B.4 of the Application, in the solicitation of the New Money Bonds. Should the Company be downgraded below investment grade, it will proceed by registering the New Money Bonds under SEC Form S-1. This form is much more complex and more costly to process than Form S-3. In such circumstance, the Company would reconsider the advisability of the issue. The Company could consider a private placement of the New Money Bonds utilizing an offering memorandum. Application, Exhibit A, pp. 11-12. 4. Financial and Credit Rating Issues In its initial preparation its financial analyses regarding the issuance of these Bonds, the Company assumed: (1) the New Money Bonds (i.e., up to $200 M) would be issued at an assumed interest rate of 7.75%, Response to Interrogatory EL-7; (2) the Collateral Bonds would bear interest rates sufficient to cover the Revolving Credit Agreement to a maximum of 11.5%, and (3) the issuance of the Bonds would not result in its credit rating being downgraded below investment grade.{2} At the hearing, CL&P notified the Department that its credit rating had been downgraded by Moody's Investor's Service (Moody's) to Bal, which is below investment grade. At that time, CL&P stated it knew of no similar action pending by Standard and Poor's Investors Service (S&P), thus it now was in the position of having a split credit rating - -- one of investment grade by S&P and one below investment grade by Moody's. Application, Exhibit A, p. 13; Responses to Interrogatories EL-13 and EL-22; Responses to Data Requests EL-DR-3 and EL-DRA; Late Filed Exhibit No.2; Tr. 4/29/97, p.11-12. In response to the Department's request for additional data, the Company provided an analysis of the effect of issuing the New Money Bonds, the Collateral Bonds and the Bonds (i.e., both types in combination) to its capital structure valued as of December 31, 1996, and based upon the Company's latest information. The results utilizing actual Company ROE are presented below: NEW MONEY BONDS (Split Rating):
Actual Pro Forma after 12/31/96 Issuance Component Weight Cost Weighted Weight Cost Weighted (%) (%) Cost (%) (%) Cost Short-Term Debt - - - - - - Long-Term Debt 53.11% 6.97% 3.70% 55.65% 7.10% 3.95% Preferred Stock 7.58% 6.44% 0.49% 7.71% 6.44% 0.46% Minority Interest 2.77% 10.17% 0.28% 2.62% 10.17% 0.27% Common Equity 36.54 % -7.77% - 2.84% 34.57% -7.77% -2.69% Weighted Average Cost of 1.634% 100.00% 1.99% Capital (WACC)
COLLATERAL BONDS (Split Rating):
Actual Pro Forma after 12/31/96 Issuance Component Weight Cost Weighted Weight Cost Weighted (%) (%) Cost (%) (%) Cost Short-Term Debt -- -- -- 8.31% 6.95% 0.58% Long-Term Debt 53.11% 6.97% 3.70% 48.69% 6.97% 3.39% Preferred Stock 7.58% 6.44% 0.49% 6.95% 6.44% 0.45% Minority Interest 2.77% 10.17% 0.28% 2.54% 10.17% 0.26% Common Equity 36.54% -7.77% -2.84% 33.51% -7.77% -2.60% Weighted Average 1.63% 100.00% 2.07% Cost of Capital (WACC)
COMBINED BONDS (Split Rating):
Actual Pro Forma after 12/31/96 Issuance Component Weight Cost Weighted Weight Cost Weighted (%) (%) Cost (%) (%) Cost Short-Term Debt - - - 5.91% 6.96% 0.41% Long-Term Debt 53.11% 6.97% 3.70% 52.36% 7.10% 3.72% Preferred Stock 7.58% 6.44% 0.49% 6.75% 6.44% 0.43% Minority Interest 2.77% 10.17% 0.28% 2.46% 10.17% 0.25% Common Equity 36.54% -7.77% -2.84% 32.53% -7.77% -2.53% Weighted Average Cost of 1.63% 100.00% 2.24% Capital (WACC)
Response to Data Request EL-DR-3; Late Filed Exhibit No. 2; Tr. 4/29/97, p. 31-35. The above tables show the impact of the proposed financings given the negative actual return on equity (ROE) for 1996 operating results. CL&P also provided additional data showing the impact of the financings on the capital structure utilizing the Department authorized ROE. Response to Data Request EL-DR-3; Response to Interrogatory EL-20. The results utilizing the allowed ROE of 11.7% are presented below: NEW MONEY BONDS (Split Rating):
Actual with Allowed ROE Pro Forma after 12/31/96 Issuance Component Weight Cost Weighted Weight Cost Weighted (%) (%) Cost (%) (%) Cost Short-Term Debt - - - - - - Long-Term Debt 53.11% 6.97% 3.70% 55.65% 7.09% 3.95% Preferred Stock 7.58% 6.44% 0.49% 7.17% 6.44% 0.46% Minority Interest 2.77% 10.17% 0.28% 2.62% 10.17% 0.27% Common Equity 36.54% 11.70% 4.28% 34.56% 11.70% 4.04% Weighted Average Cost 8.75% 100.00% 8.72% of Capital (WACC)
COLLATERAL BONDS (Split Rating):
Actual with Allowed ROE Pro Forma after 12/31/96 Issuance Component Weight Cost Weighted Weight Cost Weighted (%) (%) Cost (%) (%) Cost Short-Term Debt - - - 8.31% 6.95% 0.58% Long-Term Debt 53.11% 6.97% 3.70% 48.69% 6.97% 3.39% Preferred Stock 7.58% 6.44% 0.49% 6.95% 6.44% 0.45% Minority Interest 2.77% 10.17% 0.28% 2.54% 10.17% 0.26% Common Equity 36.54% 11.70% 4.28% 33.51% 11.70% 3.92% Weighted Average Cost of 8.75% 100.00% 8.60% Capital (WACC)
COMBINED BONDS: (Split Rating):
Actual with Allowed ROE Pro Forma after 12/31/96 Issuance Component Weight Cost Weighted Weight Cost Weighted (%) (%) Cost (%) (%) Cost Short-Term Debt - - - 5.91% 6.96% 0.41% Long-Term Debt 53.11% 6.97% 3.70% 52.36% 7.10% 3.72% Preferred Stock 7.58% 6.44% 0.49% 6.75% 6.44% 0.43% Minority Interest 2.77% 10.17% 0.28% 2.46% 10.17% 0.25% Common Equity 36.54% 11.70% 4.28% 32.52% 11.70% 3.81% Weighted Average Cost of 8.75% 100.00% 8.62% Capital (WACC)
Response to Data Request EL-DR-3; Late Filed Exhibit No. 2; Tr. 4/29/97, pp. 31-35. The response to EL-DR-4 is an exhibit depicting the all-in spread{3} over current comparable maturity Treasury yields for the proposed bond issues. In this initial estimate of the New Money Bonds, the all-in spread over Treasuries range between 1.363% for 3-year issues and 1.554% for 5-year issues assuming no change in credit rating. The Company stated its investment bankers notified them that the effect of the Moody's downgrading would result in a 10 basis point (bp) penalty for its estimated spread over Treasuries and an additional 50 bp penalty to its underwriting commission fees for a 3-year issue. A worse case scenario, being additionally downgraded by S&P, would result in a 25 bp penalty for spread over Treasuries and an additional 75 bp penalty to its underwriting commission fee for a 3-year issue. For the New Money Bonds, the all-in spread over Treasuries ranges between 1.629% for 3-year issues and 1.578% for 5-year issues with its split credit rating and between 2.129% for 3-year issues and 1.878% for 5-year issues assuming it is also downgraded by S&P. The Company stated that the effect of the issuance under a private placement scenario would raise the all- in spread over Treasuries even more as the Investment Banker would require a higher (200 bp) underwriting fee. The Company stated it was indifferent to the issuance term, and it would gauge the maturity term to investors preferences. Additionally, it was considering "sweeteners" such as call protection and additional dividend restrictions when it structures these bonds such that they are attractive to Short-Term investors. Given the Company's limited knowledge as to how investors would react to these bonds, specifics regarding the premiums these "sweetners" could command were not readily available. Responses to Interrogatories EL-7 and EL-8; Response to Data Request EL-DR-4; Late Filed Exhibit No. 2; Tr. 4/29/97, pp. 37-40. The Company also stated that any surplus funds issued through the New Money Bonds would be invested in the NU System pool to be lent to other NU subsidiaries. Response to Interrogatory EL-11; Tr. 4/29/97, pp. 40-41; pp.76-81. For the Collateral Bonds, the all-in spread over the Federal Funds rate was initially estimated at 0.763% and increased to 1.813% with the Moody's downgrade. Assuming CL&P is downgraded by both agencies, it would still incur a 1.813% all-in spread over the Federal Funds rate. The rate paid will not be a fixed coupon rate, but would be matched to the variable rate borrowed under the Revolving Credit Agreement, and vary with CL&P's actual needs. Response to Data Request EL-DR-4; Late Filed Exhibit No.2; Tr. 4/29/97, pp. 37-40. The Company also provided an analysis showing the proposed financings effect on its long-term debt and solvency ratios. These ratios are key determinants used by credit rating agencies in setting a company's rating on its outstanding debt. Although the Company expects no change to its rating as a result of this financing, the financial ratios developed show mixed results. The table below presents a summary of the key financial ratios and the pro-forma impact of the Bonds, valued at December 31,1996.
Financial Ratio: Actual Pro-Forma Impact (Split Rating) (valued 12/31/96) pre-tax interest coverage; 0.92x 0.91x decrease net cash flow/total debt 13.68% 11.26% decrease cash flow interest coverage 3.34x 2.86x decrease times interest earned. 0.34x 0.44x increase debt/equity 1.30x 1.56x increase long-term debt/total capital 54.75% 53.96% decrease total fixed charge coverage 0.94x 0.93x decrease cash flow/total debt 13.68% 11.26% decrease
Response to Data Request EL-DR-5; Late Filed Exhibit No. 2. Lastly, given the recent developments regarding Moody's downgrading to below investment grade and the need to satisfy the Bank's requirements for additional security in order to keep the Revolving Credit Agreement in place, the Company expressed the gravity of its situation in its remarks. These clearly indicate that its future ability to function and maintain financial flexibility rests on the Department's approval of this financing to secure the Revolving Credit Agreement and issue new money for working capital purposes: A rejection of these proceedings and a narrowing of the credit available to the [C]ompany could cause a much more rapid and unsatisfactory resolution. . . . If this [Application] were rejected, we would have to go back and figure it out, but I don't think it is a signal that would be taken very well. Tr. 4/29/97, pp. 9 and 90, and pp. 93-94. The Company also stated that at this time it was merely seeking approval to proceed with the issuance of the Bonds, and it would seek recovery of all prudently incurred costs at the time of its next rate proceeding. Response to Interrogatory EL-17. Additionally, the Company stated that its accounting procedures allowed it to identify separately financing costs associated with the current nuclear outages. Response to Interrogatory EL-1 4; Tr. 4/29/97, p. 47. III. DEPARTMENT ANALYSIS Overall, the goal of the Company's financing proposal is to maintain its financial flexibility in light of the continued nuclear outages at its Millstone plants and additional request for security made by the Banks. The Application describes two uses for the proceeds of the Bonds. The first is to issue Collateral Bonds to the Banks to provide security and maintain access to the funds provided under the Revolving Credit Agreement to meet the additional expenses incurred by the nuclear outages. The second is to issue New Money Bonds to raise funds for its continued working capital needs during this difficult financial situation. Overall, the Department believes that the need to issue both New Money Bonds and, especially, the Collateral Bonds is primarily a result of the Company's increased risk profile and cash requirements resulting from the continued outages at its nuclear plants. Additionally, the Department finds that as a result of CL& P's recent (April 29, 1997) Moody's credit rating downgrade, the cost of the Bonds issuance has increased by at least a 10 bp penalty in the yield spread over comparable Treasuries as a result of the increased credit rating riskiness of the Company. Should the Company be further downgraded by S&P, it expects to incur a 25 bp penalty for a double downgrading. In addition to the Treasury spread penalty, the result of Moody's downgrading is to increase the commission fee required by the investment banking firm in the placement of the New Money Bonds. Tr. 4/29/97, pp. 37-40. In evaluating the appropriateness of a bond issue, the Department generally reviews several qualitative and quantitative issues. The key financial ones are: (1) the cost of the issue (i.e., all-in spread over Treasuries); (2) the effect on the capital structure and WACC, and (3) the effect on the Company's credit rating and future creditworthiness. The Department's analysis of these issues reveals that under more normal circumstances, the issue of the Bonds, both New Money and Collateral, would probably not be approved without further modification of some of the aspects of the Company's proposal. For example, the cost of the issue reveals that all-in spread over Treasuries rose dramatically in total (from 1.363% to 1.629% for a 3-year issue) as a result of the Moody's downgrading. At minimum, the additional cost of the Moody's downgrading is an initial 60 bp (combination of 10 bp penalty in spread over Treasuries and a 50 bp additional underwriting fees) penalty in the public placement of the New Money Bonds. These costs could rise even more (a total 200 bp or a 150 bp increase over the initial estimate for underwriting commission fee) and if the Company is forced to do a private placement /or receives an additional downgrading by S&P (i.e., an additional 125 bp over the initial estimate for all-in spread over Treasuries). Relating the minimum 60 bp penalty to the funds the Company will receive from the initial issuance, the Company could incur the loss of $1.2 million in funds as a result of the downgrading alone.{4} The Bonds issuance should have a negative impact on the Company's capital structure. Utilizing actual data (i.e., with negative ROE and split rating) valued at December 31, 1996, and evaluating the issuance of the Bonds, both individually and combined, the Department finds that effect of the (independent) issue of the New Money Bonds could raise the embedded cost of Long-Term debt slightly, from 6.97% to 7.10% pro forma, and the weighted percentage of Long-Term debt in the capital structure from 53.11% to 55.64% pro forma. The combined effect of the increased weight and cost of the Long-Term debt is to increase the weighted average cost of capital (WACC) from 1.63% to 1.99% pro forma. Evaluating the (independent) issue of the Collateral Bonds, reveals a similar pattern. The effect is to increase the Short-Term debt weight and cost, respectively, from 0% and 0% to 8.31% and 6.95% pro forma. The effect of the Collateral Bond's issue is to raise the WACC from 1.63% to 2.07% pro forma. Evaluating the combined effect of the New Money Bonds and the Collateral Bonds reveals that Short-Term debt weight and cost rise, respectively, from 0% and 0% to 5.91 % and 6.96%, while the Long- Term debt weight slightly decreases from 53.11% to 52.35% pro forma and the Long-Term debt cost rises from 6.97% to 7.10% pro forma. The combined impact of the issuance to the WACC is to increase it from 1.63% to 2.29% pro forma. In evaluating these results, based upon actual data (i.e., negative ROE and split rating), the Department finds that the combined issuance increases the WACC more than either of the independent issuances. Additionally, it appears that the combined issuance's higher increase in the WACC is driven by the issuance of the Short-Term debt--the Collateral Bonds. While Department approval is not required regarding the Company's management of its Short-Term debt, the spill over effect of the Company's Revolving Credit Agreement negotiations have now entered the realm of the Department's review as the Company is requesting authority to issue the Collateral Bonds to provide additional security for the Revolving Credit Agreement. Late Filed Exhibit No. 2. The overall impact of the bond's issuance, using actual data, is to increase the WACC. In general, a pro forma increase to WACC is considered a worsening of the capital structure, while a pro forma decrease to WACC is an improvement. The Department has considered the Company's position that using actual negative ROE results, due to Millstone outages, shows a distorted view of the proposed financings and the situation is an anomaly that will turn around eventually and return the ROE to its positive level. Indeed, imputing the allowed ROE of 11.7% to actual and pro forma results after the issuance of the bonds shows WACC would decrease from 8.75% to 8.62% pro forma with the split rating. Although these results reveal a slightly positive effect on the WACC and the firm's capital structure, the Department is reluctant to consider these results in lieu of the results using actual figures. Late Filed Exhibit No. 2 The improved results are based on the Company's assumption that its allowed ROE, which was set by the Department in CL&P's last general rate case, is a better indicator of profitability than its actual ROE. Although the Company's allowed ROE assumption provides comfort that these proposed issuances under more normal circumstances would not have a negative influence on the capital structure, at this time, the Department finds that utilizing the Company's actual ROE assumption appropriately reflects the reality of the situation. If the financial situation were more normal, this proposed issuance would not be necessary. It is important to review the issuance using the most up-to-date and accurate data. Also, under normal circumstances the Department would probably not authorize, without some modification, an issuance that would have a negative impact on the Company's capital structure. In its initial presentation the Company stated the proposed financing would not result in a change to its credit rating. In the course of the proceeding, the Company's Moody's credit rating was downgraded. The Department finds that the proposed issuances should have a slightly negative impact on the financial ratios rating agencies typically review. On a stand alone basis, this result would imply that the Company could be downgraded further. In actuality, credit rating agencies review both quantitative (i.e., financial ratios) and qualitative factors to determine a firm's credit rating. For example, S&P's analysis reveals that CL&P's financial flexibility is an issue S&P has relied upon to continue to rate the Company an investment grade BBB-. At this time the Department finds the credit rating issue yields mixed results. Overall, the Department's analysis of the financial concerns typically reviewed reveals unfavorable results. The overriding piece of evidence presented is the Company stated position that it needs authority to proceed with the Bonds issuance to maintain its financial needs and meet its working capital needs. At this juncture, the Department does not want to impede the Company's continued efforts to maintain its financial flexibility. Consequently, the Department authorizes the Company to proceed with both financing proposals as presented in written and oral testimony. The Department notifies the Company that it is being provided merely with approval to proceed with the financings based upon testimony which emphasized CL&P's urgency at this time. This approval to proceed should not be interpreted as approval with respect to the prudence of costs involved with the issuances. IV. FINDINGS OF FACT 1. To maintain its Revolving Credit Agreement, the Company is required to provide security, in the form of Collateral Bonds, to its Banks. 2. The proposed financing transaction will result in a bond issuance in aggregate amount up to $430 million to be issued and outstanding at any one time (the Bonds). 3. The Bonds comprise Collateral Bonds (up to $313.71 million) and New Money Bonds (up to $200 million). 4. The New Money Bonds will be used primarily to repay Short-Term borrowings. 5. The Collateral Bonds will be used to provide security for the Company's Banks in order to maintain the Revolving Credit Agreement in place. 6. The Revolving Credit Agreement is a key element to maintain CL&P's financial flexibility. 7. The proposed financing transaction will include the issuance of First Mortgage Bonds using substantially all of CL&P's physical property and franchises as collateral. 8. Under the Revolving Credit Agreement, the Company currently pays about 6% interest on these funds. 9. The Company was downgraded to Ba1 by Moody's Investors Service on April 28, 1997. 10. The result of the Moody's downgrade is that the Company incurs an initial minimum of a 60 bp penalty (i.e., comprised of 10 bp penalty in estimated spread over treasuries and 50 bp penalty for underwriting commission) to the All-in Spread Over Treasuries it anticipates paying for the New Money Bonds. 11. The effective interest rate CL&P expects to pay, with its split rating, on the New Money Bonds is 8.09% on a 3 year issue and 8.22% as a 5 year issue. 12. CL&P expects to pay an effective interest rate (i.e., all-in costs) of 7.313% on the Collateral Bonds, with its split rating, using the Federal Funds rate as benchmark. 13. The All-in Spread over the Federal Funds rate is 1.813% with the split rating. 14. The financing transaction using actual data (i.e., actual earned ROE and split credit rating) increases the Company's WACC by 66 bps from 1.63% to 2.29%. 15. The financing transaction using the Company's allowed ROE of 11.7% decreases the WACC by 13 bps from 8.75% to 8.62%. 16. The Bonds issuance appears to have a negative effect on the financial ratios used by credit rating agencies. 17. The Company will invest any surplus funds from the Bonds issuance to the NU System Money Pool. V. CONCLUSION AND ORDERS A. CONCLUSION The Department grants approval for CL&P to proceed with the proposed financing transaction (i.e., issuing First and Refunding Mortgage Bonds consisting of a combination of up to $200 million in New Money Bonds and up to $313.75 million in Collateral Bonds, the total of the combination being no more than $430 million to be issued and outstanding at any one time). In light of the current nuclear outages and its financial condition, the Department finds the financing transaction necessary to maintain the Company's financial flexibility by retaining its Revolving Credit Agreement with its Banks and to meet its working capital needs. The instant approval does not extend to affirming the merits of the actual financing transaction, which the Department specifically considers to be a business decision by CL&P made at its own risk. The Department reserves consideration of recovery of the related expenses to such time as recovery is requested. The Department's approval is contingent upon and subject to the Orders set forth below. B. ORDERS For the following Orders, please submit to the Executive Secretary an original and six (6) copies of the requested material, identified by Docket Number, Title (specify reopening) and Order Number. 1. At such a time as the Company elects to request rate recovery of the costs associated with this Application, the Company shall notify the Department as to the method of recovery and with which Application the recovery is requested. The Company shall provide details of the related expenses for which the Company requests recovery in its notification. 2. The financing transaction shall be as specified by the Company in its Application and no further material written or oral supplements to or material modifications to the transaction shall be executed without prior written approval of the Department. 3. The proceeds from the Bonds shall be used by the Company for the purposes specified in its Application and not for non-utility purposes, other than pursuant to short-term investments in the Northeast Utilities' System money pool. The Company shall furnish to the Department within 90 days from issuance of the Bonds, a statement showing the actual amount of dollars taken and a statement reflecting how the proceeds are used. 4. Within 90 days from the issuance of the New Money Bonds, the Company shall provide the Department with an itemization of all expenses actually incurred in the transaction costs and expenses. 5. At such time as the terms and conditions of the Collateral Bonds change, the Company shall, within 30 days of the change, provide the Department with the new terms and conditions, including but not limited to: (1) the All-in Spread over Federal Funds, and (2) the All-in Costs (i.e., interest rate actually paid). 6. At such time as the terms and conditions of the New Money Bonds are established and/or subsequently changed, the Company shall provide the Department with terms and conditions during a reopening of this proceeding, including but not limited to: (1) Treasury yield; (2) Estimated Spread Over Treasuries; (3) Coupon; (4) Underwriters commission; (5) the All-in Costs (i.e., interest rate actually paid), and (6) the All-in Spread over Treasuries. 7. The Company will submit, within 60 days of completion of the financing transaction, an exhibit showing the actual all-in spread over current, comparable maturity treasury yield for the Bond's issue (i.e., New Money Bonds and Collateral Bonds), such as that provided in Response to Interrogatories EL-DR-4. 8. The Company will submit, within 60 days of completion of the financing transaction, an exhibit showing the effect the proposed financing has on its capital structure and its financial ratios used by credit rating agencies, such as those provided in Responses to Interrogatories EL-DR- 3 and EL-DR-5. 9. In future financing applications (i.e., bond issuances and bond refinancing, et al), the Company is instructed to provide, at minimum, exhibits similar to those requested by the Department in EL-DR-1; EL- DR-2; EL-DR-3; EL-DR-4, and EL-DR-6. In addition, the Company should provide any and all information the Company deems necessary for the Department to conduct a full and accurate review. **FOOTNOTES** {1} These banks are: Citibank, N.A.; Toronto Dominion (New York), Inc.; Fleet National Bank; CIBC Inc.; The First National Bank of Boston; Barclays Bank PC; Mellon Bank, N.A.; Union Bank of Switzerland, New York Branch; Swiss Bank Corporation; The Yasuda Trust and Banking Co.; LTD New York Branch, and Union Bank of California, N.A. These banks will be collectively referred to as the Banks. {2} Currently, Northeast Utilities Systems is rated BB- and CL&P is rated BBB- by S&P, while Moody's CL&P rating is Bal. A rating below BBB- would result in a non-investment grade credit rating under S&P's rating criteria, while Bal is the highest non-investment grade rating available under Moody's criteria. Response to Interrogatory EL-22; Late Filed Exhibit No.1; Tr 4/29/97, pp. 11-12. {3} The all-in cost refers to the cost measured in basis points that the Company will pay over comparable treasury securities. These costs include: the additional costs associated with the Company's riskiness over comparable treasuries (i.e., treasury securities are considered riskless) and the underwriting commission fees. DOCKET NO. 97-03-23 APPLICATION OF THE CONNECTICUT LIGHT AND POWER COMPANY TO ISSUE FIRST AND REFUNDING MORTGAGE BONDS This Decision is adopted by the following Commissioners: Thomas M. Benedict Reginald J. Smith Glenn Arthur CERTIFICATE OF SERVICE The foregoing is a true and correct copy of the Decision issued by the Department of Public Utility Control, State of Connecticut, and was forwarded by Certified Mail to all parties of record in this proceeding on the date indicated. /s/ Robert J. Murphy 5/22/97 Robert J. Murphy Date Executive Secretary Department of Public Utility Control Exhibit F.2 May 27, 1997 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. 70-8875 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, Western Massachusetts Electric Company ("WMECO") and North Atlantic Energy Corporation ("NAEC") (collectively, the "Applicants") in connection with the transactions contemplated by Post-Effective Amendment No. 2 to the Application/Declaration in the above referenced file (as amended, 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 those filed with the Application; (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 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 that Certificate and those 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. NAEC is validly organized and duly existing under the laws of the State of New Hampshire. 3. The obligations to be issued on behalf of NAEC through the Northeast Utilities System Money Pool pursuant to the terms of such Money Pool, when issued, sold or renewed, will be the valid and binding obligations of NAEC in accordance with their respective terms. 4. NAEC will legally acquire the appropriate interest in any obligation to be acquired by it from any other member of the Money Pool pursuant to the terms of such Money Pool. 5. 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 note that the Massachusetts Department of Public Utilities has not approved loans from WMECO to NAEC, and thus, until such approval has been given, NAEC may not borrow through the Money Pool from funds contributed to the Money Pool by WMECO. 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 Jeffrey C. Miller Assistant General Counsel Northeast Utilities Service Company EXHIBIT K.2 SCHEDULE OF FEES, COMMISSIONS AND EXPENSES Legal Fees Counsel to the Applicants Legal Fees $ 45,000 Disbursements $ 2,000 $ 47,000 Counsel to the Lenders Legal Fees $110,000 Disbursements $ 10,000 $120,000 Northeast Utilities Service Company (Legal, Financial, Accounting and Other Services) $ 25,000 Total Estimate of Fees, Commissions and Expenses $192,000 NORTH ATLANTIC ENERGY COR Exhibit G.1 FINANCIAL DATA SCHEDULE AS OF MARCH 31, 1997 (THOUSANDS OF DOLLARS) PRO FORMA GIVING EFFECT ITEM TO PROPOSED # DESCRIPTION PER BOOK TRANSACTION 1 Total Net Utility Plant 689,153 689,153 2 Other Property and Investments 20,826 20,826 3 Total Current Assets 34,969 74,219 4 Total Deferred Charges 267,674 267,674 5 Balancing amount for Total Assets 0 0 6 Total Assets 1,012,622 1,051,872 7 Common Stock 1 1 8 Capital Surplus, Paid In 160,999 160,999 9 Retained Earnings 35,989 34,684 10 Total Common Stockholders Equity 196,989 195,684 11 Preferred Stock Subject to Mandatory Rede 0 0 12 Preferred Stock Not Subject to Mandatory 0 0 13 Long Term Debt, Net 495,000 495,000 14 Short Term Notes 20,750 60,000 15 Notes Payable 0 0 16 Commercial Paper 0 0 17 Long Term Debt-Current Portion 20,000 20,000 18 Preferred Stock-Current Portion 0 0 19 Obligations Under Capital Leases 0 0 20 Obligations Under Capital Leases-Current 0 0 21 Balancing amount of Capitalization and Li 279,883 281,188 22 Total Capitalization and Liabilities 1,012,622 1,051,872 23 Gross Operating Revenue 167,466 167,466 24 Federal and State Income Taxes Expense 12,923 12,069 25 Other Operating Expenses 97,324 97,324 26 Total Operating Expenses 110,247 109,393 27 Operating Income (Loss) 57,219 58,073 28 Other Income (Loss), Net 12,529 12,529 29 Income Before Interest Charges 69,748 70,602 30 Total Interest Charges 37,627 39,786 31 Net Income 32,121 30,816 32 Preferred Stock Dividends 0 0 33 Earnings Available For Common Stock 32,121 30,816 34 Common Stock Dividends 0 0 35 Total Annual Interest Charges on All Bond 51,534 51,534 36 Cash Flow From Operations 0 0 37 Earnings Per Share-Primary 0.00 0.00 38 Earnings Per Share-Fully Diluted 0.00 0.00 NORTH ATLANTIC ENERGY CORPORATION BALANCE SHEET AS OF MARCH 31, 1997 (THOUSANDS OF DOLLARS) FINANCIAL STATEMENT 1.1 PAGE 1 OF 2 PRO FORMA GIVING EFFECT PRO FORMA TO PROPOSED PER BOOK ADJUSTMENTS* TRANSACTION ASSETS UTILITY PLANT, AT ORIGINAL COST: ELECTRIC $775,280 $775,280 LESS: ACCUMULATED PROVISION FOR DEPRECIATION 129,297 129,297 ------------------------------------------ 645,983 0 645,983 CONSTRUCTION WORK IN PROGRESS 9,965 9,965 NUCLEAR FUEL, NET 33,205 33,205 ------------------------------------------ TOTAL NET UTILITY PLANT 689,153 0 689,153 OTHER PROPERTY AND INVESTMENTS: NUCLEAR DECOMMISSIONING TRUST, AT MARKET 20,826 20,826 ------------------------------------------ TOTAL OTHER PROP. & INVEST. 20,826 0 20,826 CURRENT ASSETS: CASH AND SPECIAL DEPOSITS 4,834 39,250 (a) 44,084 RECEIVABLES FROM AFFILIATED COMPANIES 14,370 14,370 NOTES RECEIVABLE FROM AFFILIATES 0 TAXES RECEIVABLE 0 FUEL, MATERIALS, AND SUPPLIES, AT AVERAGE COST 13,679 13,679 PREPAYMENTS AND OTHER 2,086 2,086 ------------------------------------------ TOTAL CURRENT ASSETS 34,969 39,250 74,219 DEFERRED CHARGES: UNAMORTIZED DEBT EXPENSE 4,421 4,421 DEFERRED COST - SEABROOK 190,094 190,094 REGULATORY ASSET - INCOME TAXES 47,185 47,185 DEFERRED DOE ASSESSMENT 23,808 23,808 OTHER DEFERRED DEBITS 2,166 2,166 ------------------------------------------ TOTAL DEFERRED CHARGES 267,674 0 267,674 ------------------------------------------ TOTAL ASSETS $1,012,622 $39,250 $1,051,872 *EXPLANATION AT FINANCIAL STATEMENT 1.2 PAGE 3 OF 3 NORTH ATLANTIC ENERGY CORPORATION BALANCE SHEET AS OF MARCH 31, 1997 (THOUSANDS OF DOLLARS) FINANCIAL STATEMENT 1.1 PAGE 2 OF 2 PRO FORMA GIVING EFFECT PRO FORMA TO PROPOSED PER BOOK ADJUSTMENTS* TRANSACTION CAPITALIZATION AND LIABILITIES CAPITALIZATION: COMMON SHARES $1 $1 CAPITAL SURPLUS, PAID IN 160,999 160,999 RETAINED EARNINGS 35,989 (1,305) 34,684 ------------------------------------------ TOTAL COMMON STOCKHOLDER EQUITY 196,989 (1,305) 195,684 LONG-TERM DEBT 495,000 495,000 ------------------------------------------ TOTAL CAPITALIZATION 691,989 (1,305) 690,684 CURRENT LIABILITIES: NOTES PAYABLE TO AFFILIATED COMPANY 20,750 39,250 (a) 60,000 ACCOUNTS PAYABLE 9,548 9,548 LONG TERM DEBT CURRENT PORTION 20,000 20,000 ACCRUED TAXES 1,365 (854)(c) 511 OTHER 344 344 ACCRUED INTEREST 10,015 2,159 (b) 12,174 ------------------------------------------ TOTAL CURRENT LIABILITIES 62,022 40,555 102,577 DEFERRED CREDITS: DEFERRED CONTRACT OBLIGATIONS TO ASSOCIATED COMPANY 33,284 33,284 ACCUMULATED DEFERRED INCOME TAXES 202,538 202,538 DEFERRED SEABROOK TAX SETTLEMENT 0 0 OTHER 22,789 22,789 ------------------------------------------ TOTAL DEFERRED CREDITS 258,611 0 258,611 ------------------------------------------ TOTAL CAPITALIZATION AND LIABILITIES $1,012,622 $39,250 $1,051,872 *EXPLANATION AT FINANCIAL STATEMENT 1.2 PAGE 3 OF 3 NORTH ATLANTIC ENERGY CORPORATION INCOME STATEMENT FOR 12 MONTHS ENDED MARCH 31, 1997 (THOUSANDS OF DOLLARS) FINANCIAL STATEMENT 1.2 PAGE 1 OF 3 PRO FORMA GIVING EFFECT PRO FORMA TO PROPOSED PER BOOK ADJUSTMENTS* TRANSACTION OPERATING REVENUE $167,466 $0 $167,466 ------------------------------------------ OPERATING EXPENSES: OPERATIONS - FUEL 15,515 15,515 OTHER 35,310 35,310 MAINTENANCE 10,438 10,438 DEPRECIATION 24,342 24,342 AMORTIZATION OF REGULATORY ASSETS (912) (912) FEDERAL AND STATE INCOME TAXES 12,923 (854)(c) 12,069 TAXES OTHER THAN INCOME TAXES 12,631 12,631 ------------------------------------------ TOTAL OPERATING EXPENSES 110,247 (854) 109,393 ------------------------------------------ OPERATING INCOME: 57,219 854 58,073 ------------------------------------------ OTHER INCOME: DEFERRED SEABROOK RETURN 6,864 6,864 AFUDC-OTHER FUNDS 340 340 OTHER, NET 874 874 INCOME TAXES - CREDIT 4,451 4,451 ------------------------------------------ OTHER INCOME, NET 12,529 0 12,529 INCOME BEFORE INTEREST CHARGES 69,748 854 70,602 ------------------------------------------ INTEREST CHARGES: INTEREST ON LONG-TERM DEBT 51,534 51,534 OTHER INTEREST (685) 2,159 (b) 1,474 DEFERRED SEABROOK RETURN - BORROWED FUNDS (13,222) (13,222) ------------------------------------------ TOTAL INTEREST CHARGES, NET 37,627 2,159 39,786 NET INCOME 32,121 (1,305) 30,816 * EXPLANATION AT FINANCIAL STATEMENT 1.2 PAGE 3 OF 3 NORTH ATLANTIC ENERGY CORPORATION CAPITAL STRUCTURE ON MARCH 31, 1997 (THOUSANDS OF DOLLARS) FINANCIAL STATEMENT 1.2 PAGE 2 OF 3 PER BOOK ADJUSTED TO PRO FORMA REFLECT % PER BOOK ADJUSTMENTS PRO FORMA % LONG-TERM DEBT 72.3% $515,000 $515,000 72.5% COMMON SHARES 1 1 CAPITAL SURPLUS, PAID IN 160,999 160,999 RETAINED EARNINGS 35,989 (1,305) 34,684 ---------------------------------------------------- TOTAL COMMON STOCKHOLDER EQUITY 27.7% 196,989 (1,305) 195,684 27.5% ---------------------------------------------------- 100.0% $711,989 (1,305) $710,684 100.0% NORTH ATLANTIC ENERGY CORPORATION EXPLANATION OF ADJUSTMENTS (THOUSANDS OF DOLLARS) FINANCIAL STATEMENT 1.2 PAGE 3 OF 3 DEBIT CREDIT (a) CASH $39,250 NOTES PAYABLE $39,250 To record the additional proposed borrowing up to the entire $60 million available to the company. (b) OTHER INTEREST EXPENSE 2,159 ACCRUED INTEREST 2,159 To record the interest expense on the additional proposed borrowing at 5.5% $39,250 x 5.50% = 2,159 (c) ACCRUED TAXES 854 FEDERAL AND STATE INCOME TAX EXPENSE 854 To record the reduction in Federal and State income taxes due to the higher interest and fee expenses: $854 x 39.55% = 854 NOTE 1 : Proforma financials reflect company borrowings at the proposed SEC limit and the associated interest expense without reflecting equity or interest earnings of such borrowings. -----END PRIVACY-ENHANCED MESSAGE-----