EX-99 3 exhlnurule24122303.txt EXHIBIT L - FEASIBILITY STUDY Exhibit L NORTHEAST UTILITIES MONEY POOL FEASIBILITY STUDY December 22, 2003 EXECUTIVE SUMMARY This report follows the June 30, 2003 Securities and Exchange Commission order to submit a feasibility study concerning the creation of a separate money pool for non-utility subsidiaries of Northeast Utilities by December 31, 2003. This report outlines the methodology used for the study and presents the study's findings. INTRODUCTION 1. This report evaluates the impact on the NU system of using two separate money pools; one for the non-utility subsidiaries and one for the utility subsidiaries of Northeast Utilities ("NU") instead of one combined money pool, using the historical money pool activities during the study period. 2. Non-Utility Subsidiaries of NU are: Northeast Generation Company, NU Enterprises, Inc., The Rocky River Realty Company, The Quinnehtuk Company, NorConn Properties, Inc, Select Energy Services, Inc., Select Energy, Inc., Select Energy New York, Inc., Northeast Generation Services Company, Woods Electrical Co., Inc., E. S. Boulos Company, Yankee Energy Services Company, Mode 1 Communications, Inc., Woods Network Services, Inc., and Yankee Energy Financial Services Company. 3. Utility Subsidiaries of NU are: The Connecticut Light and Power Company, Western Massachusetts Electric Company, Public Service Company of New Hampshire, Yankee Gas Services Company, Holyoke Water Power Company, North Atlantic Energy Corporation, Northeast Nuclear Energy Company, and Yankee Energy System, Inc. 4. In this report NU is treated as a member of both the Non- Utility and Utility money pools but is not permitted to borrow from either pool. 5. Study period: Jan. 2000 - Sept. 2003 STUDY METHODOLOGY 1. Historical daily Money Pool transactions from January 2000 through September 2003 were grouped into Utility and Non-Utility group categories. These transactions were then applied to the appropriate Money Pool. 2. NU was allowed to participate solely as a lender in both the Utility and the Non-Utility Money Pool. 3. Ending Money Pool balances were re-calculated for the Utility and Non-Utility Money Pools. 4. Utility Subsidiaries were afforded borrowing priority over Non-Utility Subsidiaries. Accordingly, NU first funded any short- falls in the Utility Money Pool. NU then provided secondary funding for any short-falls in the Non-Utility Money Pool. 5. In the event that either the Utility or Non-Utility Money Pools had a cash short-fall unable to be funded by NU, an external revolver borrowing was assumed to have been initiated. External borrowings were initiated by NU Parent if the Non- Utility Money Pool had the short-fall and initiated by one of the Utility Subsidiaries if the Utility Money Pool had a short-fall. The ability to transfer funds to NU by a subsidiary in one Money Pool with available cash through dividends or other means, to enable NU to invest such funds in the other Money Pool was not used in the study. 6. The interest rate used for interest expense associated with the additional external borrowings was the average interest rate based on the actual bank loans. 7. The interest rate used for the interest income associated with the additional money market investments that resulted from the additional external borrowings was the average interest rate based on the actual money market investments. 8. The additional administrative costs associated with maintaining separate Money Pool bank accounts and additional bank transfers that would be necessary to transfer NU funds between the two Money Pools was not included in the evaluation. 9. The historical interest expense for the NU system was compared to the interest expense from the separate Money Pools. FINDINGS NU found that the use of two separate money pools, one for its non-utility subsidiaries and one for its utility subsidiaries, was feasible and, if used during the test period, would not have resulted in a significant increase in NU's interest expense. The study utilized historical money pool data to determine the change in (1) bank borrowings, (2) money market investments, (3) interest expense and (4) interest income that would have resulted from separate money pools. The study result is that net interest expense for the NU system would have increased by an aggregate of $2.7 Million over the 3.75 year period of the study. Additional means to limit this increase, such as dividends to NU Parent to allow cash transfer between the two money pools, were not considered in the study. Additionally, the study found that during the test period there would have been no substantive benefit from having a separate non-utility money pool. This is primarily due to NU Parent generally having sufficient cash to fund both money pools. However, it should be noted that the study period does not necessarily represent the typical financial condition of the NU system. For example, during the test period, the Utility Subsidiaries were in a positive cash position as a result of selling substantially all of their generation assets and this led to fewer borrowings by the Utility Subsidiaries (either externally or through the NU Money Pool), and fewer external borrowings by NU to fund the Non- Utility Subsidiaries. In a more typical situation, it is possible that there would be more borrowings required and the use of two money pools could lead to a less efficient use of system funds. For example, such an inefficient use of system funds would exist in a situation where a Utility Subsidiary has excess cash and a Non-Utility Subsidiary needs to borrow cash. With one Money Pool, the Utility Subsidiary could lend its excess cash to the Money Pool at the Fed Funds rate for use by the Non-Utility Subsidiary. With two pools, the Utility Subsidiary would invest its funds in external investments and NU would borrow funds from its short-term credit facility to lend to the Non-Utility Subsidiary through the Non-Utility Money Pool. The interest rate paid by NU would generally be higher than the interest earned by the Utility Subsidiary. The end result is an inefficient use of system cash and increased administrative costs As noted above, these inefficiencies would be mitigated by the Utility Subsidiaries dividending excess cash to NU, for further investment in the Non-Utility subsidiaries. ANALYSIS OF INTEREST EXPENSE AND INCOME NU SYSTEM COMBINED MONEY POOL ($ thousands) BANK LOAN INTEREST EXPENSE 2000 2001 2002 YTD 9/30/03 Average Daily Bank Loan Balance (1) 290,303 99,746 136,804 34,441 Interest Expense 24,523 6,753 3,962 808 Average Interest Rate 8.45% 6.77% 2.90% 2.35% MONEY MARKET FUND INTEREST INCOME 2000 2001 2002 YTD 9/30/03 Average Investable Balance (2) 64,863 186,152 38,892 36,047 Interest Income 3,992 7,881 684 322 Average Interest Rate 6.15% 4.23% 1.76% 0.89% Net Interest Expense / (Income) 20,531 (1,128) 3,278 487 ANALYSIS OF INTEREST EXPENSE AND INCOME SEPARATE MONEY POOLS UTILITY & NON-UTILITY ($ thousands) PRO-FORMA BANK LOAN INTEREST EXPENSE 2000 2001 2002 YTD 9/30/03 Average Daily Bank Loan Balance (1) 319,280 142,527 173,745 34,467 Pro-forma Interest Expense 27,117 9,993 5,049 809 Average Interest Rate 8.49% 7.01% 2.91% 2.35% PRO-FORMA MONEY MARKET FUND INTEREST 2000 2001 2002 YTD INCOME 9/30/03 Average Investable Balance (2) 93,840 228,934 75,833 36,332 Pro-forma Interest Income 5,771 9,684 1,335 436 Average Interest Rate 6.15% 4.23% 1.76% 1.20% Net Interest Expense / (Income) 21,346 309 3,715 373 Net Change in Interest Expense / 815 1,437 437 - (Income) Percent Change Interest Expense / 3.97% - 13.34% - (Income) Footnotes: Method of Calculation (1) Average daily bank loan balance is the sum of all bank loans issued multiplied by the number of days outstanding, divided by the number of days in the year for 2000, 2001 & 2002. For YTD - 9/30/03 the divisor was 273 days. (2) Average investable balance is the sum of all daily surplus money pool cash balances divided by the number of days in the year for 2000, 2001 & 2002. For YTD - 9/30/03 the divisor was 273 days. BANK LOAN INTEREST EXPENSE (COMBINED MONEY POOL STRUCTURE) NU SYSTEM COMBINED MONEY POOL REGULATED COMPANIES ($ thousands) BANK LOAN INTEREST EXPENSE 2000 2001 2002 YTD 9/30/03 Average Daily Bank Loan Balance (1) 168,964 52,642 82,084 13,208 Interest Expense 13,659 3,186 2,350 293 Average Interest Rate 8.08% 6.05% 2.86% 2.22% NU SYSTEM COMBINED MONEY POOL UNREGULATED COMPANIES ($ thousands) BANK LOAN INTEREST EXPENSE 2000 2001 2002 YTD 9/30/03 Average Daily Bank Loan Balance (1) 121,339 47,104 54,721 21,233 Interest Expense 10,864 3,567 1,611 515 Average Interest Rate 8.95% 7.57% 2.94% 2.43% BANK LOAN INTEREST EXPENSE (SEPARATE MONEY POOL STRUCTURE) NU SYSTEM SEPARATE UTILITY MONEY POOL ($ thousands) PRO-FORMA BANK LOAN INTEREST 2000 2001 2002 YTD EXPENSE 9/30/03 Average Daily Bank Loan Balance (1) 168,964 52,642 82,084 13,208 Pro-forma Interest Expense 13,659 3,186 2,350 293 Average Interest Rate 8.08% 6.05% 2.86% 2.22% NU SYSTEM SEPARATE NON-UTILITY MONEY POOL ($ thousands) PRO-FORMA BANK LOAN INTEREST 2000 2001 2002 YTD EXPENSE 9/30/03 Average Daily Bank Loan Balance (1) 150,315 89,885 91,662 21,259 Pro-forma Interest Expense 13,458 6,807 2,699 516 Average Interest Rate 8.95% 7.57% 2.94% 2.43% MONEY MARKET FUND INTEREST INCOME (COMBINED MONEY POOL STRUCTURE) NU SYSTEM COMBINED MONEY POOL ($ thousands) MONEY MARKET FUND INTEREST INCOME 2000 2001 2002 YTD 9/30/03 Average Investable Balance (2) 64,863 186,152 38,892 36,047 Interest Income 3,992 7,881 684 322 Average Interest Rate 6.15% 4.23% 1.76% 0.89% MONEY MARKET FUND INTEREST INCOME (SEPARATE MONEY POOL STRUCTURE) NU SYSTEM MONEY POOL SEPARATE UTILITY POOL ($ thousands) PRO-FORMA MONEY MARKET FUND 2000 2001 2002 YTD INTEREST INCOME 9/30/03 Average Investable Balance (2) 93,840 228,934 75,833 36,332 Pro-forma Interest Income 5,771 9,684 1,335 436 Average Interest Rate 6.15% 4.23% 1.76% 1.20% NU SYSTEM MONEY POOL SEPARATE NON-UTILITY POOL ($ thousands) PRO-FORMA MONEY MARKET FUND INTEREST 2000 2001 2002 YTD INCOME 9/30/03 Average Investable Balance (2) 1,795 13,582 3,715 18,133 Pro-forma Interest Income 110 575 65 218 Average Interest Rate 6.15% 4.23% 1.76% 1.20% Footnotes: Method of Calculation (1) Average daily bank loan balance is the sum of all bank loans issued multiplied by the number of days outstanding, divided by the number of days in the year for 2000, 2001 & 2002. For YTD - 9/30/03 the divisor was 273 days. (2) Average investable balance is the sum of all daily surplus money pool cash balances divided by the number of days in the year for 2000, 2001 & 2002. For YTD - 9/30/03 the divisor was 273 days.