Eversource 2003 Annual Report Download - page 31

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contracts, be asked to provide approximately $231 million of collateral or
letters of credit to various unaffiliated counterparties and approximately
$65 million to several independent system operators and unaffiliated
local distribution companies, which management believes NU would cur-
rently be able to provide. NU’s credit ratings outlooks are currently stable
or negative, but management does not believe that at this time there is
a significant risk of a ratings downgrade to sub-investment grade levels.
NU has applied to the Securities and Exchange Commission (SEC) for
authority to expand its financial support of NU Enterprises. NU primarily
seeks to 1) increase its allowable investments in certain of its unregulated
businesses, presently 15 percent of its consolidated capitalization as
permitted by SEC regulation, by an additional $500 million, 2) increase
the limit for its guarantees of all of its competitive affiliates from $500
million to $750 million, and 3) increase its allowable investments in
exempt wholesale generators (EWGs) from $481 million to $1 billion.
If granted, the SEC’s order would permit NU’s future investment in Select
Energy above the amount now allowed. NU has no present plans to
significantly expand its EWG portfolio at this time. However, if an invest-
ment opportunity becomes available, NU would be able to pursue it
within the new allowable EWG investment level. NU expects SEC
approval in early 2004.
If the application is not granted in early 2004 as management expects,
then there could be a negative impact on the merchant energy business
line’s ability to achieve its 2004 earnings estimate. This business line
depends on NU parent guarantees to support the energy contracts that
make up both its revenues and expenses. At December 31, 2003, NU
parent could guarantee an additional $211.5 million of merchant energy
business line contracts, but guarantee levels constantly fluctuate with
the market value of the contracts that are guaranteed, and NU’s ability
to issue new guarantees may be constrained due to the aforementioned
SEC limitation.
For further information regarding Select Energy’s activities and risks, see
Note 3, “Derivative Instruments, Market Risk and Risk Management,”
and Note 10, “Accumulated Other Comprehensive Income/(Loss),” to
the consolidated financial statements.
Business Development and Capital Expenditures
Utility Group: NU anticipates that it will continue to increase its level of
capital expenditures at the Utility Group to meet customers’ increasing
needs for additional and more reliable energy supplies. Investments in
Utility Group plant totaled $505.8 million in 2003, compared with $447
million in 2002 and $411.9 million in 2001.
Connecticut — CL&P: Over the next several years, the majority of NU’s
capital spending will be at CL&P, where the company is seeking to
upgrade and expand an aging and, in some locations, stressed distribution
and transmission system. CL&P’s capital expenditures totaled $314.6
million in 2003, compared with $239.6 million in 2002 and $236.2 million
in 2001. CL&P expects capital expenditures to increase to $440 million in
2004. CL&P spent $246 million on distribution in 2003 and anticipates
spending $228 million on distribution in 2004.
In its final 2003 CL&P rate decision, the DPUC authorized rate recovery
of distribution capital expenditures totaling $236 million in 2004,
$220 million in 2005, $216 million in 2006, and $225 million in 2007.
On July 14, 2003, the Connecticut Siting Council (CSC) approved a
345,000 volt transmission line project from Bethel, Connecticut to
Norwalk, Connecticut, proposed in October 2001 by CL&P. The
configuration of the new transmission line, enhancements to an existing
115,000 volt transmission line, and work in related substations are
estimated to cost approximately $200 million. The line will alleviate
identified reliability issues in southwest Connecticut and help reduce
congestion costs for all of Connecticut. An appeal of the CSC decision
by the City of Norwalk is pending, but management does not expect the
appeal to be successful. CL&P anticipates placing the new transmission
line in service by the end of 2005. This project is exempt from the State
of Connecticut’s moratorium on the approval of new electric and natural
gas transmission projects. At December 31, 2003, CL&P has capitalized
$12.4 million associated with this project.
On October 9, 2003, CL&P and United Illuminating (UI) filed for approval
of a separate 345,000 volt transmission line from Norwalk, Connecticut
to Middletown, Connecticut. Estimated construction costs of this project
are approximately $620 million. CL&P will jointly site this project with UI,
and CL&P will own 80 percent, or approximately $496 million, of the
project. This project is also exempt from the State of Connecticut’s
moratorium on the approval of new electric and natural gas transmission
projects. CL&P expects the CSC to rule on the application in 2004 and for
construction to occur from 2005 through 2007. At December 31, 2003,
CL&P has capitalized $9.2 million related to this project.
In September 2002, the CSC approved a plan to replace an undersea
electric transmission line between Norwalk, Connecticut and Northport –
Long Island, New York, at an estimated cost of $90 million. CL&P and
the Long Island Power Authority each own approximately 50 percent of
the line. The project still requires federal and New York state approvals.
Given the approval process, changing pricing and operational rules in
the New England and New York energy markets and pending business
issues between the parties, the expected in-service date remains under
evaluation. This project is also exempt from the State of Connecticut’s
moratorium on the approval of new electric and natural gas transmission
projects. At December 31, 2003, CL&P has capitalized $5.2 million
associated with this project.
Construction of these three projects would significantly enhance CL&P’s
ability to provide reliable electric service to the rapidly growing energy
market in southwestern Connecticut. Despite the need for such facilities,
significant opposition has been raised. As a result, management cannot
be certain as to the expected in-service dates or the ultimate cost of
these projects. Should the plans proceed, applicable law provides that
CL&P will be able to recover its operating cost and carrying costs
through federally-approved transmission tariffs.
Management believes that construction of the 345,000 volt projects is
critical to maintaining service reliability in southwest Connecticut. The
345,000 volt projects, in addition to additional transmission spending
planned between 2004 and 2007, also represent a significant source
of potential earnings growth for NU. Management believes that if the
projects now being considered are all built over the next four years, NU’s
net transmission plant investment would triple. Revenues and earnings
for NU’s transmission system are established by the FERC.