Eversource 2003 Annual Report Download - page 24

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NU projects that cash flows provided by operating activities will decline
significantly in 2004 from 2003, even if net income increases, as a result
of expected refunds to CL&P’s customers or applications of previous
overcollections to current costs as a result of recent regulatory decisions.
There was a lower level of investing and financing activity in 2003 as
compared to 2002, which was primarily due to the sale of Seabrook, the
acquisition of Woods Electrical Co., Inc. (Woods Electrical) and Woods
Network and the issuance of rate reduction bonds in 2002. Cash flows
used for investments in plant increased to $550 million in 2003 from
$485 million in 2002 and $451.4 million in 2001 as a result of increased
levels of capital expenditures at the Utility Group. NU expects capital
expenditures to reach $738 million in 2004.
There was a lower level of investing and financing activity in 2002 as
compared to 2001, primarily due to the following items that occurred in
2001: the issuance of long-term debt, the issuance of rate reduction
bonds, the use of proceeds from the sale of Millstone, the buyout and
buydown of independent power producer (IPP) contracts, the retirement
of preferred stock and other preferred securities and the retirement of
certain other capital lease obligations.
The retirement of rate reduction bonds does not equal the amortization
of rate reduction bonds because the retirement represents principal
payments, while the amortization represents amounts recovered from
customers for future principal payments. The timing of recovery does not
exactly match the expected principal payments.
Aside from the rate reduction bonds outstanding, NU has a modest level
of sinking fund payments and debt maturities due between 2004 and
2011, averaging $56.3 million annually and totaling $64.9 million in
2004. Most of the debt that must be repaid during that time was issued
by NU parent, NGC, Yankee Gas, and SESI. No CL&P, PSNH or WMECO
debt issues mature during that eight-year period.
The level of common dividends totaled $73.1 million in 2003, compared
with $67.8 million in 2002 and $60.9 million in 2001. The 2003 increase
resulted from NU paying a dividend of $0.1375 per share in the first two
quarters of 2003 and $0.15 per share in the second two quarters of
2003. The level of dividends in 2002 was $0.125 per share in the first
two quarters and $0.1375 per share in the second two quarters.
Management expects to continue to increase the dividend level, subject
to NU’s ability to meet earnings targets and the judgment of its Board of
Trustees at the time dividends are declared. In recent years, NU’s Trustees
have addressed dividend increases at the company’s annual meeting, the
next of which is on May 11, 2004. On January 12, 2004, the NU Board
of Trustees approved the payment of a dividend of $0.15 per share on
March 31, 2004, to shareholders of record at March 1, 2004.
Overall liquidity remained high at December 31, 2003, despite the
increase in the common dividend and the repurchase of 1.5 million
shares in 2003 at a cost of $20.5 million, due primarily to cash earnings
from the Utility Group subsidiaries. NU’s liquidity was also strengthened
by the aforementioned issuance of $150 million in notes by NU parent.
Excluding rate reduction bonds as they are non-recourse to NU, NU’s
consolidated capitalization was comprised of 46 percent common
shareholders’ equity, and 54 percent preferred stock and long-term debt
at December 31, 2003, as compared with 47 percent common share-
holders’ equity and 53 percent preferred stock and long-term debt at
December 31, 2002. As a result of the Utility Group’s proposed expansion
plans, management expects capital requirements to increase over the
next several years but will continue to target a 45 percent equity and
55 percent debt capitalization structure.
Utility Group: NU’s higher debt levels reflect the sale of $55 million of
10-year senior unsecured notes by WMECO on September 30, 2003, at
a coupon rate of 5.0 percent. WMECO used the proceeds from this debt
issue to reduce its level of short-term borrowings from the NU Money
Pool. On October 1, 2003, CL&P fixed the interest rate on $62 million of
variable-rate, tax-exempt notes for five years at 3.35 percent. These
notes mature in 2031. On January 30, 2004, Yankee Gas closed on the
private placement of $75 million of 10-year first-mortgage bonds carrying
an interest rate of 4.8 percent. The proceeds from these bonds were
used to reduce short-term debt.
By the end of 2003, NU had completed the first stage of a comprehensive
restructuring of its business profile. For CL&P that marked the sale of all
electric generation in the period of 1999 through 2002 and the recovery
of almost all of its unsecuritized stranded costs. The sale of assets and
recovery of stranded costs have provided CL&P with extremely strong
cash flows over the past five years. Those proceeds allowed CL&P to
repay more than half of its debt and preferred securities and to return
hundreds of millions of dollars of equity capital to NU. CL&P has not
issued any new long-term debt since mid-1997. Aided by relatively low
cost power supply contracts from 2000 through 2003, CL&P was able to
maintain retail rates that were relatively low for New England and generally
10 percent below those charged by CL&P in 1996.
The year 2004, however, will show a significant change in CL&P’s financial
statements, even if net income remains relatively stable. The settlement
of the dispute between CL&P and its standard offer service suppliers over
a portion of the incremental costs incurred following the implementation
of SMD on March 1, 2003, will have a significant negative impact on
CL&P’s cash flows in 2004 as compared to 2003. In 2003, CL&P was
withholding payment of a portion of the incremental SMD costs from
suppliers pending resolution but was recovering the costs from ratepayers
at the same time. Through January 31, 2004, CL&P collected approximately
$155 million from customers. Of this amount, $31.1 million was used in
CL&P’s operating cash flows and is secured by a surety bond. The remaining
$124 million was deposited into an escrow account, and escrow account
deposits through December 31, 2003 were $93.6 million and are included
in restricted cash - LMP costs on the accompanying consolidated balance
sheets. As a result of the settlement, CL&P will pay approximately $83
million to suppliers and return the remainder to its customers.
Another significant negative impact to CL&P’s cash flows will be the refund
of previously overcollected stranded costs to CL&P’s customers. The
Connecticut Department of Public Utility Control (DPUC) stated in CL&P’s
transitional standard offer (TSO) docket that CL&P should either refund
$262 million of overcollections back to customers or use these overcollections
to pay for cash expenses over the next four years, beginning in 2004.
These refunds or applications of past cash collections to future expenses,
combined with CL&P’s capital expansion program, will require CL&P to
issue debt securities and receive equity infusions from NU parent over
the next several years. CL&P is expected to issue up to $250 million of
first mortgage bonds in 2004.