DE 99-017 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, INC. Petition for Approval of Extension, Modification and/or Amendment and Substitution of Series D and E Pollution Control Revenue Bond Letters of Credit and Reimbursement Agreements and Related Security Arrangements Order Approving Financing Arrangements O R D E R N O. 23,162 March 9, 1999 APPEARANCES: Catherine E. Shively, Esq. for Public Service Company of New Hampshire; Ann Ross, Esq. for Retail Merchants Association; Michael W. Holmes, Esq. for the Office of the Consumer Advocate; and Eugene F. Sullivan, III, Esq. for the Staff of the New Hampshire Public Utilities Commission. I. PROCEDURAL HISTORY On January 29, 1999, Public Service Company of New Hampshire (PSNH) filed a Petition with the New Hampshire Public Utilities Commission (Commission) requesting approval under RSA 369 to extend and amend or replace $39,500,000 Series D and $69,700,000 Series E Letters of Credit, and Series D and E Reimbursement Agreements to (i) extend the maturity date of the Series D and E Letters of Credit, (ii) extend existing accounts receivable security, if necessary, (iii) amend the existing interest rates, fees, and expenses to reflect current market conditions, (iv) amend certain business covenants, and (v) substitute agent and participating banks as necessary. In addition, PSNH requested, pursuant to N.H. Admin. Rule PART Puc 201.05, that the Commission waive the 14 day notice provision of N.H. Admin. Rule Puc 203.01(a) and (b), and also requested that the Commission partially waive the requirement of 308.11(b)(6) which requires three years of forecast data in the Company's filed statement of source and application of funds and capitalization after giving effect to the proposed financing. On February 2, 1999, the Commission issued an Order of Notice scheduling a prehearing conference to entertain petitions to intervene, to set a procedural schedule and to hear the initial positions of the parties. The duly noticed prehearing conference was held on February 10, 1999, at which PSNH, the Office of the Consumer Advocate and Commission Staff appeared, presented their initial positions and agreed upon a procedural schedule. On February 19, 1999 the Commission issued Order No. 23,149 providing its approval for the procedural schedule agreed to by the Staff and parties. That procedural schedule provided for a hearing on the merits on March 4, 1999. At the hearing, the late intervention request of Retail Merchants Association (RMA) was taken up. Over the objection of PSNH, the Commission ruled from the bench that RMA's limited intervenor status request was approved since RMA merely wished to make a closing statement and would not cross-examine witnesses. II. POSITIONS OF THE PARTIES AND STAFF A. PSNH PSNH, through its witness Randy A. Shoop, Assistant Treasurer-Finance, asked the Commission to approve its requests as being in the public interest and the best solution that could be negotiated. Mr. Shoop indicated that the lending community continued to have concerns with respect to the uncertainties of the regulatory environment, particularly relating to industry restructuring. He stated that except for a modification to the covenant dealing with restricted payments (dividends and non-utility generator payments), and the higher fees from the existing facility as indicated on Exhibit 4, the terms and conditions of the instant financing are virtually the same as the Letters of Credit (LOCs) authorized by the Commission last year in docket DF 98-016, Order No. 22,876. The change in restricted payments would allow PSNH to pay out up to $40 million in either NUG payments or dividends to its parent Northeast Utilities (NU), with no sub-limit on dividends as in last year's financing. PSNH requested as well that the Commission provide its approval for extension of this financing for an additional 364 day period, so as to obviate the need for petitioning the Commission again one year from now. The Company asked that the Commission not restrict it from paying any dividends to NU, as it had in approving the extension of the LOCs in DF 98-016. Mr. Shoop pointed out that, under the terms of this financing, PSNH was restricted by the banks from investing in the NU Money Pool for the 364 day term of this financing. B. Office of the Consumer Advocate The OCA did not present direct testimony in this proceeding, but cross-examined Company and Staff witnesses. In a closing statement Mr. Holmes asserted that PSNH should continue to be restricted from paying dividends at least until the rate proceeding in DR 97-059 is resolved and the amount of a potential overrecovery is known. C. Retail Merchants Association Ms. Ross, in a closing statement, also urged the Commission to restrict the Company from paying dividends. D. Staff Staff, through its witness Mark A. Naylor, Finance Director, supported the Company's petition for extension of the LOCs generally and the terms and conditions therein. Staff also took the position that PSNH should not be further restricted from paying a dividend to NU, up to the $40 million as allowed by the lenders, and pointed to the increasing proportion of more-costly equity capital in the Company's capital structure. Mr. Naylor also provided a review of the Company's financial status and cash flow situation, and averred that PSNH would have adequate cash on hand in the coming year to meet any contingencies. He further pointed out that the Company, though continuing to be restricted by its lenders from investing in the NU Money Pool, was not restricted from borrowing from the Pool should any cash shortfalls arise. The Staff expressed no concerns about the Company's decision not to extend its Revolving Credit Agreement, and indicated its agreement with PSNH's expressed intention to apply with its sister companies later this year to lenders for an NU system Revolving Credit Agreement in which PSNH would have its own sub-limit of borrowing capacity. Mr. Naylor pointed out that the covenants contained in the LOC agreements contained the same language with respect to industry restructuring that concerned him in last year's proceeding. Finally, Staff did not support the Company's request for an automatic extension of this financing approval for an additional 364 days out into 2001, preferring instead that the Company file a petition again next year so that any changes in the LOC agreements or in circumstances with respect to PSNH itself can be evaluated at that time. III. COMMISSION ANALYSIS PSNH has requested permission to enter into agreements for the issuance of LOCs of 364 days in duration to secure payments on its long term, variable rate Series D and E PCRBs. The LOCs are, therefore, an integral component of the long term notes and we will review the request pursuant to the provisions of RSA 369:1. Cf., RSA 369:7. Under the provisions of RSA 369:1, no utility engaged in business in this State may enter into any agreement evidencing indebtedness unless the Commission finds the terms and conditions of the indebtedness "consistent with the public good." The provisions of RSA 369:1 further specify that the Commission may attach "such reasonable terms and conditions [to its approval] as the commission may find to be necessary in the public interest." RSA 369:1. Moreover, in Appeal of Easton, 125 N.H. 205 (1984) the New Hampshire Supreme Court held that 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. Based on our review of the record, we find the Company's proposal regarding the extension and/or replacement of its current LOCs as described above to be in the public interest. We recognize PSNH's imminent need to renegotiate the LOCs as they will expire on April 22, 1999. We will rely upon Mr. Shoop's testimony that the terms of the LOCs are the best resolution the Company was able to negotiate to meet PSNH's immediate financial needs. As noted by Mr. Naylor, the LOCs under review herein contain the same covenant language that the Commission found troublesome last year. More specifically, certain covenants purport to limit or restrict the Commission's latitude and discretion with regard to restructuring of the electric industry. Thus, as recommended by Mr. Naylor, we will qualify our approval of the LOCs by noting that such approval should not be construed "in any way [to] concede that this approval restricts or limits our authority to implement RSA 374-F or any other statutory responsibility." Re Public Service Company of New Hampshire, Inc., Order No. 22,876 (March 20, 1998). We note that Mr. Shoop testified that lenders do waive restrictions in the ordinary course of dealings. With regard to the Company's request that we eliminate the dividend prohibition ordered in DF 98-016, we do not believe it is in the public interest for the Company to make a payment of dividends at this time. Mr. Shoop's oral and prefiled testimony (Exhibit 2, page 5) make clear that the banks are "concerned about the significant uncertainty involving New Hampshire restructuring, Fuel and Purchased Power Adjustment Clause ("FPPAC"), and rate case proceedings". We share those concerns. PSNH has been estimating an underrecovery in FPPAC which approximates $80 million. Moreover, PSNH has been operating under the temporary rate provisions of RSA 378:27 since July 1, 1997. Because temporary rates must be reconciled upon the establishment of permanent rates, the Company is exposed to the potential of a substantial liability to ratepayers should the Commission ultimately set just and reasonable permanent rates at or below the current temporary levels. We believe ratepayers should have the security that PSNH has the means and ability to effectuate such a refund should it be necessary. The Company did not renew its short term Revolving Credit Agreement, relying instead on cash on hand and access to the so-called NU Money Pool to meet any short term capital requirements. While we concur with both of those decisions, we do not believe contributions to the NU Money Pool are appropriate at this time. We believe PSNH should retain its current liquidity to meet its operating needs and any potential capital projects that might arise, both on a short term and long term basis. We also note that the financial constraints placed on PSNH's parent and affiliates because of the Millstone outages have not yet fully abated. While the financial drain has abated to some degree with the return to service of Millstone III, that outage has resulted in significant disallowances for PSNH's affiliates. Furthermore, Millstone II has not returned to service and Millstone I has been retired from service prior to the end of its operating license and expected life. Given the poor financial health of PSNH affiliates as a result of these outages, we do not believe it would be prudent for PSNH to declare dividends or to make any contributions or investments in the NU Money Pool, at least at this time. PSNH has also requested that we allow it to renew the LOCs in 364 days without the need for further approval from the Commission. We will not grant this request. Given the pendency of the permanent rate proceeding, the continuing financial challenges occasioned by the Millstone outages and other aspects of the Company's situation that are in flux, circumstances are likely to change requiring our analysis of the terms and conditions of the LOCs in that environment. To the extent that the Company has the means and determination to make a dividend payment to its parent or an investment in the NU Money Pool, we direct the Company to first obtain approval from this Commission. We would be willing to consider such requests either in the rate case proceeding, docket DR 97-059, or another appropriate proceeding. Based upon the foregoing, it is hereby ORDERED, that PSNH's petition for approval for Extension, Modification and/or Amendment and Substitution of Series D and E Pollution Control Revenue Bond Letters of Credit and Reimbursement Agreements and Related Security Arrangements is hereby APPROVED, subject to the modifications as discussed herein; and it is FURTHER ORDERED, that PSNH gain Commission approval prior to making any dividend payments or any investment in the NU Money Pool; and it is FURTHER ORDERED, that the Company's requests for waiver of NH Admin. Rule PART Puc 203.01(a) and (b) and partial waiver of Puc 308.11(b)(6) are hereby GRANTED; and it is By order of the Public Utilities Commission of New Hampshire this ninth day of March, 1999. Douglas L. Patch Susan S. Geiger Nancy Brockway Chairman Commissioner Commissioner Attested by: Thomas B. Getz Executive Director and Secretary