DF 98-016 Public Service Company of New Hampshire Petition for Approval of Extension, Modification and/or Amendment of Various Financial Instruments, and for Issuance of First Mortgage Bonds and for the Granting of Additional Security Order Approving Financing O R D E R N O. 22,876 March 20, 1998 APPEARANCES: Catherine E. Shively, Esq. for Public Service of New Hampshire; James Monahan for Cabletron Systems, Inc.; Dean, Rice and Howard by Mark Dean, Esq. for the New Hampshire Electric Cooperative, Inc.; Michael W. Holmes, Esq. for the Office of Consumer Advocate; and Eugene F. Sullivan III, Esq. for the Staff of the New Hampshire Public Utilities Commission. I. PROCEDURAL HISTORY On February 20, 1998, Public Service of New Hampshire ("PSNH" or the "Company") filed a Petition with the New Hampshire Public Utilities Commission ("Commission") for approval under RSA 369, inter alia, (1) to amend the Series D and Series E Letters of Credit ("LOC"), which currently support the Company's Series D and Series E Pollution Control Revenue Bonds("PCRBs"), and Series D and E Reimbursement Agreements to (i) extend the terms of the Series D and E Letters of Credit for 364 days, (ii) provide for accounts receivable security, (iii) amend the existing interest rates, fees and expenses to reflect both current market conditions and financial community concerns regarding PSNH, and (iv) amend certain business covenants; (2) to modify (through amendment or new agreement) the short term $125,000,000 Revolving Credit Agreement ("RCA") to (i) provide for first mortgage bond security, and (ii) provide for accounts receivable security; and (3) to issue up to $125 million of its first mortgage bonds in one or more series under its First Mortgage Bond Indenture, to evidence and secure its obligation under the Revolving Credit Facility. The Company contemporaneously filed a Motion for Waiver of Notice and the prefiled testimony of David R. McHale, Assistant Treasurer of Finance for Northeast Utilities. On February 23, 1998 an Order of Notice was issued granting expedited treatment to the petition, waiving, in part, the fourteen-day notification requirement of N.H. Admin. Rules Puc 203.01, and scheduling a Prehearing Conference for March 5, 1998. On March 2, 1998, Cabletron Systems, Inc. ("Cabletron") filed a Motion to Intervene. The Office of Consumer Advocate ("OCA") is a statutorily authorized intervenor. On March 4, 1998, the Company filed the supplemental testimony of David R. McHale and additional exhibits. At the Prehearing Conference PSNH, the OCA, and the New Hampshire Public Utilities Commission Staff ("Staff") stated their preliminary positions and agreed upon a procedural schedule. The Commission issued Order No. 22,872 on March 16, 1998 approving the procedural schedule and granting Cabletron intervenor status. On March 9, 1998, PSNH filed a Motion for Protective Order with respect to certain confidential financial information requested by the Staff. PSNH also filed additional attachments and exhibits to the petition and to the original testimony of David R. McHale. On March 13, 1998, testimony was filed by Kenneth E. Traum, Finance Director, and William Homeyer, Economist, of the OCA and Mark A. Naylor, Staff's Acting Finance Director. The Commission held hearings on March 17 and 18, 1998, to investigate the merits of the Company's proposed financing. At the March 17, 1998 hearing, the New Hampshire Electric Cooperative, Inc. ("NHEC") made a verbal motion to intervene based upon NHEC's contractual relationship with PSNH. The motion was granted with the condition that the NHEC would waive the right to appeal issues that could have been raised at the prehearing conference. II. POSITIONS OF THE PARTIES AND STAFF A. PSNH The Company believes its proposal is in the public good, and is the best possible solution to its financing needs. The Company notes that the majority of covenants in the LOC and RCA agreements are basically the same as those that have been in place since 1991. The Company asserts that the banks will view negatively any changes to the terms and conditions of the negotiated financing and that this will result in failure of the proposed transaction. Given the short time period in which this financing must be consummated, PSNH contends that it will not have the opportunity to pursue any other financing options. It believes that not having the proposed financing approved as presented could place the Company in either voluntary or involuntary bankruptcy. The Company takes the position that approving the financing in this docket, as presented, will not impair the Commission's ability to proceed as the Commission deems necessary in other dockets. B. Cabletron Cabletron cross-examined the Company's witness, but did not offer a position on the financing. C. OCA The OCA takes the position that if the Commission approves the filing, such approval should be conditioned upon the following: covenants which affect restructuring issues should be modified; and PSNH should be required to receive Commission approval prior to paying or committing to pay any common stock dividends or putting significant dollars into the NU Money Pool until such time that Millstone III is running at full capacity. Otherwise, the OCA takes the position that the Commission should order the Company to obtain bridge financing and convene a hearing pursuant to the NH Supreme Court decision of Appeal of Easton, 125 N.H. 205 (1984). The OCA sees the need for an Easton hearing on the basis that public policy is being weighed against approval of this financing. The OCA criticizes the Company's failure to examine other alternatives which would not contain the covenants which arguably could "hinder restructuring". It is the OCA's assertion that PSNH failed to weigh the public policy costs in its financing decision and looked only at the economic costs. D. Staff Staff believes the Commission should approve the Company's financing, but is concerned with the possible implications of certain covenants of this financing with respect to the Commission's duty under RSA 374-F. Staff recommends covenant changes to eliminate any conditions that may restrict the Commission in the restructuring area. Given the Company's current credit ratings, Staff views the increased costs of the new financing as unavoidable. III. COMMISSION ANALYSIS Under RSA 369:4, as interpreted by the New Hampshire Supreme Court in Appeal of Easton, the Commission must "determine whether, under all the circumstances the financing is in the public good - a determination which includes considerations beyond the terms of the proposed borrowing." Appeal of Easton, 125 N.H. at 213. The Commission may also attach reasonable conditions that are in the public interest. Id. Based on our review of the record, we find the Company's financing proposal as described above to be in the public interest. We recognize PSNH's imminent need to refinance and we will rely upon Mr. McHale's testimony that this is the best resolution he was able to negotiate to meet PSNH's financial needs. Arguably some of the language in certain covenants may appear to in some manner limit or restrict the Commission's latitude with regard to restructuring of the electric industry. In approving this petition, however, we do not in any way concede that this approval restricts or limits our authority to implement RSA 374-F or any other statutory responsibility. In closing arguments, PSNH explicitly stated its confidence in its ability to obtain waivers needed for any "reasonable restructuring solution". To the extent that it becomes necessary to do so, we will hold PSNH to its commitment to "diligently pursue" such waivers. Notwithstanding the changes that the entire industry is undergoing, the Company's strong financial position, as evidenced by its excess interest coverage ratio and equity to capitalization ratio, as well as its strong earnings and cash flow, should give banks comfort to consider such waivers. Given the Company's need for cash for the non-utility generator settlements, the current situation at the Millstone facilities, and the Company's past practices, we remain concerned about dividend payments to the parent company at this time. We are reminded that PSNH was well aware of its upcoming financing needs in February of 1997 when it paid a dividend of $85 million to its parent company. Here, we recognize that the lender covenants limit PSNH to $25 million in dividend payments from cash on hand. To the extent that the Company has the means and determination to make a dividend payment to its parent, we direct the Company to first obtain approval from this Commission. The financial covenants in the LOC and RCA amendment preclude the Company from investing in the NU Money Pool, revealing the banks' concern with cash leaving PSNH. We share these concerns, especially in light of the financial difficulties at Northeast Utilities, Connecticut Power and Light, and Western Massachusetts Electric due to the shut-down of the Millstone facilities. Due to these concerns, we direct the Company to obtain Commission approval prior to investment in the NU Money Pool, in the event the banks waive the covenant which restricts such investments. We find the uses for the renewal of the Letters of Credit to support the Company's PCRBs and uses for the renewal of the Company's short term line of credit to, in part, meet maturity of the Company's Series B First Mortgage Bonds, to be in the public good. We also find the fact that the Company is fixing the rates on its tax-exempt Series D and Series E PCRBs which will reduce the reliance upon the Letters of Credit by approximately 50% to be in the public good. Based upon the foregoing, it is hereby ORDERED, that the Commission hereby approves and authorizes, pursuant to RSAs 369:1,2,3 and 4, the extension and amendment by PSNH of the Series D Letter of Credit and Series D Reimbursement Agreement to (i) extend the term of the Series D Letter of Credit; (ii) provide for accounts receivable security; (iii) amend the existing interest rates, fees and expenses; and (iv) amend certain business covenants, all as described in the petition and testimony of PSNH in substantially the same form as the documentation submitted by PSNH to the Commission; and it is FURTHER ORDERED, that the Commission hereby approves and authorizes, pursuant to RSAs 369:1,2,3 and 4, the extension and amendment by PSNH of the Series E Letter of Credit and Series E Reimbursement Agreement to (i) extend the term of the Series E Letter of Credit; (ii) provide for accounts receivable security; (iii) amend the existing interest rates, fees and expenses; and (iv) amend certain business covenants, all as described in the petition and testimony of PSNH in substantially the same form as the documentation submitted by PSNH to the Commission; and it is FURTHER ORDERED that the Commission hereby approves and authorizes, pursuant to RSAs 369:1,2,3, and 4, the modification by PSNH (through amendment or new agreement) of the Revolving Credit Facility to (i) provide for first mortgage bond security; and (ii) provide for accounts receivable security, all as described in the petition and testimony of PSNH and in substantially the same form as the documentation submitted by PSNH to the Commission; and it is FURTHER ORDERED, that the Commission hereby approves and authorizes, pursuant to RSAs 369:1,2,3 and 4, the issuance by PSNH of up to $125,000,000 of its first mortgage bonds in one or more series under its First Mortgage Bond Indenture, to evidence and secure its obligations under the Revolving Credit Facility, with principal, interest, payment and other related terms as provided in the Revolving Credit Facility (as modified as described above), all as described in the petition and testimony of PSNH and in substantially the same form as the documentation submitted by PSNH to the Commission; and it is FURTHER ORDERED, that PSNH gain Commission approval for any dividend payment to its parent company during the 364-day term of the new financing; and it is FURTHER ORDERED, that PSNH gain Commission approval for any investment in the NU Money Pool during the 364-day term of the new financing. By order of the Public Utilities Commission of New Hampshire this twentieth day of March, 1998. Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger Chairman Commissioner Commissioner Attested by: Thomas B. Getz Executive Director and Secretary