Fitch revises Northeast Utilities’ rating outlook to negative

NEW YORK, May 20, 2003 — Fitch Ratings has revised Northeast Utilities’ (NU) Rating Outlook to Negative from Stable. NU’s current senior unsecured rating is ‘BBB’.

The Negative Rating Outlook reflects uncertainty as to who will bear the added costs of locational marginal pricing (LMP) in Connecticut and the potential default by NRG Power Marketing (NRG-PM) on a crucial supply contract with Connecticut Light & Power’s (CL&P).

While it is possible that some or all of these costs will ultimately be borne by Connecticut consumers, it is also possible that CL&P and its affiliate Select Energy will incur additional expenses from now through year-end 2003. Some of these issues were outlined in Fitch’s Feb. 25, 2003 press release revising CL&P’s Rating Outlook to Negative.

The Negative Outlook has been extended to its parent NU because of uncertainty relating to the incurrence of additional costs at Select and the likely liquidity demands upon CL&P and NU.

NRG-PM is currently contracted to serve 45% of CL&P customers’ energy demand for standard offer service (SOS) through the remainder of 2003. As part of its recent bankruptcy filing, NRG-PM asked the court to approve its rejection of the SOS contract because it remains unprofitable and an impediment to NRG’s restructuring.

Separately, an effort by NRG to terminate the contract based on claimed violations by CL&P was temporarily prevented by the Federal Energy Regulatory Commission (FERC) on May 16, 2003. FERC will issue an expedited decision on NRG’s attempt to immediately terminate the contract, though the agreement may still be rejected during the bankruptcy proceedings.

There is a strong likelihood that CL&P will face higher costs for SOS energy. CL&P may purchase and pay for replacement power at market prices or solicit bids for replacement power for the balance of the contract term or possibly pay higher prices to induce NRG-PM to continue to serve.

Because CL&P’s rates are capped until Jan. 1, 2004, and the existing contract price of $0.045 per kilowatt hour (kwh) is below current forward market prices, the company would be exposed to significantly higher substitute power prices. CL&P estimates that replacement power, including associated LMP charges, could cost approximately $0.08 per kwh or $200 million above what the company is currently paying on the NRG contract for the remainder of the year.

Summer demand combined with significant transmission congestion could result in considerably higher replacement costs for NRG-PM’s share of the SOS energy, depending on market conditions. While CL&P would seek recovery of any increased power supply costs, it is not certain that the Connecticut Department of Public Utility Control (DPUC) would pass these expenses on to customers promptly. In the event the contract is rejected, CL&P will pursue termination damages equal to excess replacement power costs above the current contract price as an unsecured creditor in NRG’s bankruptcy proceedings.

The second recent significant event relates to the implementation of LMP in New England and the resulting elevated costs in Connecticut due to transmission constraints. The DPUC is allowing CL&P to recover approximately $31million in LMP costs from customers on a temporary basis for 60 days, subject to refund. Pursuant to the DPUC’s instructions, CL&P intends to file with the FERC for a declaratory judgment on whether suppliers or CL&P is responsible for these new costs.

If FERC determines that CL&P bears responsibility, CL&P has a strong case to recoup LMP costs from consumers, but the restructuring law in Connecticut provides no clear directions as to the timing or mechanics. However, if FERC rules that responsibility lies with the power suppliers, affiliate Select Energy, which supplies 50% of CL&P’s customer energy demand, would incur associated LMP costs not recoverable from consumers. The ultimate size of these LMP payments is assumed to run between $75 million to $125 million for the remainder of 2003, though hot summer weather could push these expenses even higher.

Positively, CL&P and the NU group currently have strong corporate liquidity. While CL&P is not expected to generate free cash flow this year due to a substantial capital spending program, the utility and its parent together have over $500 million in cash and available credit facilities that largely expire in November 2003.

Also mitigating a potential long-term liquidity strain is the expiration of the existing contracts at year-end 2003. Fitch anticipates that new restructuring legislation currently under discussion in Connecticut will provide a clear means for CL&P to recover its future power procurement costs beginning in 2004. Fitch will continue to monitor the status of the NRG contract and all regulatory proceedings in Connecticut and at FERC.

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