Eversource 2005 Annual Report Download - page 23

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Most of the working capital and LOCs required by NU Enterprises are
currently used to support the wholesale marketing business. As NU
Enterprises’ wholesale contracts expire or are exited, its liquidity
requirements are expected to decline. However, the sale or renegotiation
of additional longer-term below market wholesale power contracts will
likely require NU Enterprises to continue to make significant payments
to the counterparties in such transactions.
Strategic Overview
In 2005, NU announced the decision to exit all of NU Enterprises’
competitive businesses and increase its investment in its regulated
businesses to a significantly higher level. Exiting these businesses,
which management expects to substantially complete by the end of
2006, will simplify NU’s business model, reduce business risk, improve
financial flexibility, enhance earnings visibility and predictability, and
capitalize on the value of generation assets in New England. Exiting
these businesses is also expected to help benefit the credit ratings of
NU and its Utility Group companies. Credit rating agencies generally
require lower coverage ratios for regulated transmission and distribution
companies than for competitive generating and marketing companies
because the stability and predictability of regulated company cash
flows is generally much higher. As a result, management believes that
once the competitive businesses are fully exited, the company will be
able to maintain its current investment grade ratings with higher levels
of debt and interest expense than if the competitive businesses
were retained.
NU expects the Utility Group to invest up to $4.3 billion in its electric
transmission and distribution and natural gas distribution businesses
from 2006 through 2010. Those amounts include up to $2.3 billion
for the high-voltage electric transmission system and $2 billion for the
electric and natural gas distribution systems and regulated generation.
NU estimates that when it successfully meets this goal, it will achieve
compounded annual regulated rate base growth through 2010 of
approximately 14 percent, assuming appropriate regulatory actions.
That growth rate would include compounded annual growth of
approximately 29 percent in its regulated electric transmission rate
base and 8 percent in its regulated distribution and generation rate
base. Based on the issuance of 23 million common shares in
December of 2005 and projected issuances of additional common
shares beyond 2007, parent company expenses, and assuming
appropriate regulatoryactions, NU estimates that it could achieve
earnings per share growth of between 8 percent and 10 percent
annually beginning with 2007.
Enterprise Risk Management
In 2005, NU adopted Enterprise Risk Management (ERM) as a
methodology for managing the principle risks of the company. ERM
involves the application of a well-defined, enterprise-wide methodology
which will enable NU’sRisk and Capital Committee, comprised of
senior NU officers, to oversee the identification, management and
reporting of the principal risks of the business.
NU Enterprises Divestitures
On March 9, 2005, NU announced that NU Enterprises would exit its
wholesale marketing business and its energy services businesses. On
November 7, 2005, NU announced its decision to exit the remainder
of NU Enterprises’ competitive businesses, which includes the retail
marketing and competitive generation businesses. NU intends to apply
the net proceeds from the exiting of these businesses to debt reduction
and the financing of the regulated businesses’ capital spending programs.
An overview of this process is as follows:
Wholesale Marketing Business: In 2005, NU Enterprises recorded a net
negative after-tax mark-to-market charge of $278.9 million related to
the wholesale energy contracts being exited. Included in this negative
mark-to-market charge, in 2005 NU Enterprises paid or agreed to pay
approximately $242 million to complete the exit from its New England
wholesale sales contracts. In 2005, all but approximately $56 million of
that sum was paid. NU Enterprises’ exposure related to its remaining
wholesale power obligations in the PJM power pool, which expire in
2008, and in New York, which consists of a single contract that expires
in 2013, continues to decline as these obligations roll off.
Retail Marketing Business: NU has retained J. P. Morgan as a financial
advisor in exiting the retail marketing business, which provides electricity
and natural gas service to approximately 30,000 customer locations in
New England, New York and PJM. Sales documents were distributed
to prospective buyers of the retail marketing business in January of
2006 and indicative bids, which were received in February of 2006, are
under evaluation. NU plans to close on the sale of the retail marketing
business in mid-2006.
The decision to exit the retail marketing business also required that
the retail sales contracts be evaluated to determine whether these
contracts are derivatives, and if so, whether these contracts should be
marked-to-market. After a thorough review, the company concluded
that these contracts should not be marked-to-market at December 31,
2005 because most of these contracts arenot derivatives, but should
continue to be accounted for on the accrual basis. The sales revenue
to be received from these contracts is below current market prices,
and the retail marketing business will likely be sold without the benefit
of either certain below market supply contracts or supply from NU
Enterprises’ generation resources. As a result, a payment to the buyer
may be required to exit the retail marketing business. This payment will
depend upon the results of the bidding process currently underway
and market prices at the time of divestiture and could be significant.
NU is currently in the process of marketing the retail business.
Competitive Generation Business: NU has also retained J. P.Morgan as a
financial advisor in exiting the competitive generation business, which
includes NGC’s and HWP’s competitive generation assets in
Massachusetts and Connecticut. Sales documents weredistributed
to prospective buyers of the generation assets in Februaryof 2006
and NU expects to close on the sale of the generation assets by the
end of 2006.
Energy Services Businesses: In 2005, NU Enterprises sold two of its six
energy services businesses, SECI-NH and Woods Network, for a total of
approximately $6.5 million. In January of 2006, the Massachusetts service
location of SECI-CT was sold for approximately $2 million. NU Enterprises
expects to complete the sale of SESI during 2006. NU Enterprises is in