Eversource 2003 Annual Report Download - page 25

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CL&P will continue to increase its distribution and transmission construction
program to meet Connecticut’s electric service reliability needs. CL&P
projects capital spending of approximately $440 million in 2004,
compared with $314.6 million in 2003 and $239.6 million in 2002. Over
time, the capital program will add to CL&P’s asset base and net income.
Under FERC policy, transmission owners cannot bill customers for new
plant until it enters service. However, transmission owners may capitalize
debt and equity costs during the construction period through an
allowance for funds used during construction (AFUDC). Debt costs
capitalized offset interest expense with no impact on net income, while
equity costs capitalized increase net income. CL&P expects to fund its
construction expenditures with approximately 45 percent equity and 55
percent debt. As a result of the size of the projects and the duration of
the construction, a growing level of CL&P’s earnings over the next four
years is expected to be in the form of equity-related AFUDC. While the
return on and recovery of the capitalized debt and equity AFUDC benefits
earnings and cash flows after the projects enter service, AFUDC has no
positive effect on cash flows until the projects are reflected in rates.
Capital spending at PSNH totaled $105.6 million in 2003, compared
with $108.7 million in 2002. In 2003, PSNH spent over $20 million to
buy down contracts with 14 small power producers and funded $30.1
million to acquire the assets of Connecticut Valley Electric Company
(CVEC) and buy out a related wholesale power contract. The $30.1 million
was placed in escrow at December 31, 2003 and is included in special
deposits on the accompanying consolidated balance sheets. PSNH
expects to increase its capital spending to approximately $160 million in
2004, assuming it receives satisfactory regulatory approval for a $70 million
conversion of a 50 megawatt generating unit at its Schiller Station to
burn wood chips. Such a level of spending is likely to require PSNH to
issue in 2004 its first new debt since it exited bankruptcy in 1991.
Yankee Gas has also been investing heavily in its infrastructure since it
was acquired by NU in March 2000. In November 2003, Yankee Gas
received regulatory support to build a 1.2 billion cubic foot natural gas
storage facility in Waterbury, Connecticut. As a result of that project and
other initiatives, Yankee Gas projects $60 million of capital expenditures
in 2004, compared with $55.2 million in 2003.
In November 2003, the Utility Group renewed its $300 million credit line
under terms similar to the previous arrangement that expired in
November 2003. There were $40 million in borrowings outstanding on
this credit line at December 31, 2003.
In addition to its revolving credit line, CL&P has an arrangement with a
financial institution under which CL&P can sell up to $100 million of
accounts receivable. At December 31, 2003 and 2002, CL&P had sold
accounts receivable of $80 million and $40 million, respectively, to that
financial institution. For more information on the sale of receivables, see
“Off-Balance Sheet Arrangements” in this Management’s Discussion and
Analysis and Note 1P, “Summary of Significant Accounting Policies —
Sale of Customer Receivables” to the consolidated financial statements.
In November 2003, CL&P received approval from its preferred shareholders
for an extension of a 10-year waiver that allows CL&P’s unsecured debt
to rise to 20 percent of total capitalization. CL&P preferred shareholders
approved a similar waiver in 1993 that will expire in March 2004. The
approval waives a requirement that unsecured debt represent no more
than 10 percent of total capitalization.
Rate reduction bonds are included on the consolidated balance sheets of
NU, CL&P, PSNH, and WMECO, even though the debt is non-recourse to
these companies. At December 31, 2003, these companies had a total
of $1.7 billion in rate reduction bonds outstanding, compared with $1.9
billion outstanding at December 31, 2002. All outstanding rate reduction
bonds of CL&P are scheduled to amortize by December 30, 2010. PSNH’s
rate reduction bonds are scheduled to fully amortize by May 1, 2013, and
those of WMECO are scheduled to fully amortize by June 1, 2013.
Interest on the bonds totaled $108.4 million in 2003, compared with
$115.8 million in 2002 and $87.6 million in 2001, the year of issuance.
Cash flows from the amortization of rate reduction bonds totaled
$153.2 million in 2003, compared with $148.6 million in 2002 and
$98.4 million in 2001. Over the next several years, retirement of rate
reduction bonds will increase, and interest payments will steadily
decrease, resulting in no material changes to debt service costs on the
existing issues. CL&P, PSNH and WMECO fully recover the amortization
and interest payments from customers through stranded cost revenues
each year, and the bonds have no impact on net income. Moreover, as
the rate reduction bonds are non-recourse, the three rating agencies
that rate the debt and preferred stock securities of these companies do
not reflect the revenues, expenses, or outstanding securities related to the
rate reduction bonds in establishing the credit ratings of these companies
or of NU.
NU Enterprises: NU’s higher debt levels reflect SESI borrowings of
$63.4 million in 2003 to finance the implementation of energy saving
improvements at customer facilities. Cash flows from SESI’s share of
customer energy savings will repay the debt. While NU parent guarantees
SESI’s performance under most of the contracts, NU parent does not
guarantee repayment of the debt, nor is the debt recourse to NU parent.
Select Energy was one of CL&P’s standard offer service suppliers that
incurred incremental locational marginal pricing (LMP) costs during
2003. CL&P did not pay Select Energy for these costs, which negatively
impacted the operating cash flows of NU Enterprises in 2003. If the
FERC approves the settlement of the wholesale power contract dispute
over the responsibility for LMP costs, then there will be a positive impact
on NU Enterprises’ cash flows in 2004.
In November 2003, NU parent renewed its $350 million credit line with
terms similar to its previous arrangement that expired in November
2003. There were $65 million in borrowings outstanding on this credit
line at December 31, 2003. In addition, Select Energy had $106.9 million
in letters of credit outstanding under this credit line primarily to support
its marketing activities.
NU Enterprises continues to have a minimal level of capital spending. In
2002, NU Enterprises acquired certain assets and assumed certain
liabilities of Woods Electrical, an electrical services company, and Woods
Network, a network design, products and service company. The
acquisitions were for $16.3 million in cash. NU Enterprises made no
other business acquisitions in 2002 or 2003.
Impacts of Standard Market Design
On March 1, 2003, the New England Independent System Operator
(ISO-NE) implemented SMD. As part of SMD, LMP is utilized to assign
value and causation to transmission congestion and line losses. Transmission
congestion costs represent the additional costs incurred due to the need
to run uneconomic generating units in certain areas that have transmission