Eversource 2001 Annual Report Download - page 20

Seabrook. NGC also is expected to pay annual dividends to NU
as allowed by the bond covenants contained in NGC’s 2001 bond
indenture.
Yankee Gas Services Company (Yankee Gas) is expected to
reinvest its earnings in its distribution expansion program. NU is
expected to make an additional equity contribution to Yankee Gas
in 2002 to help fund its expansion program. CL&P’s dividend
policy will depend largely on its earnings and the timing and
scope of its expected increasing investment in its distribution and
transmission system. In 2002, both CL&P and WMECO may
make additional dividend payments to NU to help achieve their
target leverage ratios of approximately 55 percent, excluding rate
reduction bonds. As of December 31, 2001, CL&P’s capitaliza-
tion included total debt of approximately 48 percent and
WMECO’s capitalization included total debt of approximately 52
percent, in each case excluding rate reduction bonds.
The NU system has $50.5 million of sinking fund obligations
due in 2002, primarily at NU parent and NGC. Management
expects to meet those obligations through operating cash flows.
Additionally, NU plans to refinance a $263 million variable-rate
note with a fixed-rate note in April 2002, to take advantage of
current interest rates. NU also expects to meet its capital expendi-
ture and common dividend obligations in 2002 primarily
through operating cash flows, while maintaining excess funds for
further common share repurchases.
Beyond 2001, management expects that Yankee Gas will likely
need to issue additional long-term debt to fund its capital invest-
ment program, even without paying any common dividends to
NU. CL&P also may need to issue long-term debt if its currently
planned transmission construction program is approved by regu-
lators. Current debt levels at WMECO are expected to remain
stable in future years and the level at PSNH may decline, contin-
gent upon the results of the sale of NAEC’s share of Seabrook.
The NU system could need additional sources of capital to fund
expansion of its competitive energy subsidiaries in future years,
but management cannot currently estimate that amount.
Competitive Energy Subsidiaries
NU’s competitive energy subsidiaries grew significantly in 2001
with revenues of $3 billion, compared with revenues of $1.9 bil-
lion in 2000. Earnings, however, declined to $5 million before the
cumulative effect of an accounting change in 2001, as compared
to a contribution toward NU’s consolidated earnings of $13.6
million before an extraordinary charge in 2000. NU’s competitive
energy subsidiaries own and manage 1,436 MW of generation
capacity, including 1,289 MW at NGC and 147 MW at HWP.
These businesses also include wholesale and retail energy market-
ing organizations and an expanding trading business. The energy
marketing organizations also buy and sell natural gas and other
fuels. The competitive energy subsidiaries also include Select
Energy Services, Inc. (SES) (formerly HEC Inc.), which performs
energy management services for large industrial, commercial and
institutional facilities, including the United States Department of
Defense, and Northeast Generation Services Company (NGS),
which operates and maintains NGC’s and HWP’s generation
assets and provides third-party contracting services for power
plants and large industrial facilities.
NU operates its competitive energy subsidiaries as a combined
entity. However, in connection with the initial financing of NGC
and its issuance of nonrecourse debt, Select Energy has an above-
market contract to purchase energy and related products from
NGC. Select Energy’s performance under that contract is guaran-
teed by NU. Select Energy has another contract to acquire power
from HWP’s 147 megawatt coal-fired Mount Tom generating
unit in Holyoke, Massachusetts. Primarily as a result of the favor-
able terms to NGC and HWP in those contracts, NGC earned
$42.3 million on revenues of $129.7 million in 2001 and HWP
earned $4.4 million on revenues of $55.2 million in 2001. Both
of NU’s primary energy services businesses also were profitable in
2001 with NGS earning $4.6 million on revenues of $112 mil-
lion and SES earning $2.4 million on revenues of $102 million.
Select Energy’s marketing and trading business combines the out-
put and capacity from NGC and HWP with other generation and
provides wholesale and retail electric service throughout the
Northeast United States. In addition to electricity, Select Energy
sells natural gas and other fuels on a wholesale and retail basis.
NU’s investment in Select Energy grew in 2001 due in large
part to the acquisition of NMEM, and the need to post additional
working capital as a result of a significantly increased level of busi-
ness. NU invested $109.4 million of equity in Select Energy in
2001 and Select Energy had borrowings from the parent company
of $162 million and $114.1 million at December 31, 2001 and
2000, respectively. This investment was partially offset by the
return of $75 million to NU parent through a combination of
capital and common dividends by NGC in October 2001.
One of management’s primary goals in 2002 is to improve the
results of Select Energy’s energy marketing and trading businesses.
T o r educe risk, Select Energy has already procured almost 100
percent of the projected on-peak and the vast majority of the off-
peak electricity requirements needed to serve the CL&P standard
offer service load. In addition, management continues to work
with state regulators to increase CL&P’s standard offer service
price to make it more competitive with alternative energy suppli-
ers. Select Energy management also continues to work with third
parties to arrange new profitable energy contracts to replace a
number of wholesale contracts that are in the process of expiring.
Management also expects the operations of SENY to significantly
increase its business in New York and to generate positive net
income in 2002.
NU provides credit assurance in the form of guarantees and
letters of credit for the financial performance obligations of cer-
tain of its competitive energy subsidiaries. NU currently has
authorization from the Securities and Exchange Commission
(SEC) to provide up to $500 million of guarantees, and has
applied for authority to increase this amount to $750 million. As
of December 31, 2001, NU had provided approximately $268.2
million and $45 million of such guarantees and letters of credit,
respectively. In addition, NU’s “aggregate investment” in Select
Energy and its other energy service companies (but not including
NGC, HWP or certain subsidiaries of SES) (which is inclusive of
most of such credit assurances) is limited by SEC rule to 15 per-
cent of NU’s most recent quarterly consolidated capitalization. In
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