Eversource 2003 Annual Report Download - page 27

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Legal Costs: Through December 31, 2003, legal costs incurred by CL&P
related to NRG’s bankruptcy and the SMD dispute amounted to $2.3
million. This amount has been recorded as a regulatory asset, and CL&P
received approval to recover $1.6 million in its recent rate case. CL&P
will continue to defer these legal costs as they are incurred, and
management believes that amounts in excess of $1.6 million will also be
recovered from customers.
Meriden Gas Turbines, LLC: Yankee Gas, E.S. Boulos Company (Boulos),
which is a subsidiary of NGS, and CL&P are or have been involved in
ongoing litigation with Meriden Gas Turbines, LLC (MGT), an NRG
subsidiary that was not included in NRG’s voluntary bankruptcy proceeding,
related to the construction of a generating plant that MGT stated it was
abandoning.
Yankee Gas has expended costs in excess of $16 million in the construction
of a natural gas pipeline to the generating plant that MGT was constructing.
Yankee Gas drew down on an MGT $16 million letter of credit (LOC)
when MGT stated that it was abandoning construction of the generating
plant. MGT has contested the draw down on the LOC in a lawsuit filed in
Connecticut Superior Court. Yankee Gas has a counterclaim pending
against MGT to recover additional monies in accordance with the contract
that are in excess of the $16 million LOC. This litigation is ongoing.
Boulos has a 50 percent interest in a joint venture that was building
switchyards for the MGT generating plant. In the fourth quarter of 2003,
Boulos settled all outstanding claims against MGT with no material
financial impact.
MGT also currently owes CL&P $0.5 million for work on the South
Kensington switching station, which was to be the interconnection point
for the MGT generating plant. CL&P has joined pending foreclosure
proceedings in an effort to recover the outstanding balance.
Management does not expect that the resolution of the aforementioned
NRG exposures will have a material adverse effect on the financial
condition or results of operations of NU and its subsidiaries.
NU Enterprises
Business Lines: NU Enterprises aligns its activities into two business lines,
the merchant energy business line and the energy services business line.
The merchant energy business line includes Select Energy’s wholesale
and retail marketing activities. Also included are 1,440 MW of generation
capacity, consisting of 1,293 MW at NGC and 147 MW at HWP, which
support the merchant energy business line. The energy services business
line includes the operations of SESI, NGS, and Woods Network.
SESI performs energy management services for large commercial customers,
institutional facilities and the United States government. SESI engages in
energy-related construction services. NGS operates and maintains NGC’s
and HWP’s generation assets and provides third-party electrical services.
In 2003, NGS also performed engineering contracting services.
Results and Outlook: Financial performance at NU Enterprises improved
in 2003, losing $3.5 million, compared with losses of $53.2 million in
2002. The 2003 loss includes the after-tax loss of approximately $36
million associated with the aforementioned settlement of the wholesale
power contract dispute with CL&P. Excluding that loss, NU Enterprises
earned $32.2 million in 2003. During 2004, NU expects that NU
Enterprises will continue to be successful and will produce net income in
the range of $28 million to $38 million, or $0.22 to $0.30 per share.
Management estimates that between $24 million and $31 million of
those earnings in 2004 will come from the merchant energy business
line and between $4 million and $7 million from the energy services
business line. Those ranges are heavily dependent on NU Enterprises’
ability to achieve targeted wholesale and retail origination margins,
successfully manage its contract portfolios and achieve targeted growth
in the energy services business line.
Select Energy’s merchant energy business line includes wholesale marketing
and retail marketing activities. Wholesale marketing activities include
wholesale origination, portfolio management and the operation of more
than 1,400 MW of pumped storage, hydroelectric and coal-fired generation
assets. Wholesale marketing activities earned $31.8 million in 2003,
excluding the after-tax loss associated with the settlement of the
aforementioned wholesale power contract dispute, compared to losses
of $24.7 million in 2002. NGC earned $38.5 million in 2003, compared
with $30.4 million in 2002. HWP lost $0.5 million in 2003 compared
with a loss of $0.9 million in 2002. NGC’s results benefit from an
above-market contract with Select Energy. The above-market price
continues through 2005, but the contract has been extended through
2006, though at a lower cost to Select Energy. NU parent will continue
to guarantee the performance of Select Energy in that contract through
2006. Wholesale marketing activities benefited from above-average
precipitation in western New England during 2003, which increased
conventional hydroelectric output, as compared with near drought
conditions during 2002. This increase in output resulted in $5 million
of additional net income in 2003, as compared to 2002. Wholesale
marketing activities also benefited from the absence of natural gas trading
losses in 2003.
Select Energy signed a number of wholesale marketing contracts in 2003
for delivery to electric utilities in 2004. All contracts were won in competitive
bidding processes. Total wholesale sales in 2004 are expected to exceed
40 million megawatt-hours, based on the contracts in effect as of
January 1, 2004. The most significant contracts are with CL&P, NSTAR,
National Grid USA, WMECO, Jersey Central Power & Light, and Atlantic
City Electric Co. Most of the contracts noted above will expire in 2004.
Select Energy will bid on additional contracts in 2004 that will take effect
in 2004 and beyond. Select Energy’s ability to secure a significant amount
of wholesale load is a critical factor in NU Enterprises’ overall profitability.
Select Energy must realize enough gross margin from its sales to cover
its overhead and taxes and produce a reasonable profit for NU.
Overhead includes personnel and facility costs, credit requirements and
carrying costs on NGC and HWP generation. The Northfield Mountain
pumped storage facility, a 1,080 megawatt unit in Northfield,
Massachusetts, plays a critical role in the success of Select Energy.
Northfield’s ability to generate large amounts of on-peak energy using
water that was pumped uphill during off-peak hours and its ability to
react rapidly to changing demand allow Select Energy to economically
hedge much of the 2004 earnings risk that results from entering into full
requirements supply obligations. As a result of a new competitively bid
contract, Select Energy will continue to be CL&P’s largest wholesale supplier
in 2004, but at a significantly higher rate. Management expects that the
improved terms of Select Energy’s new CL&P contract will have a positive
impact on NU Enterprises’ 2004 earnings.