Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2006, for Northeast Utilities (NU) and its subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The company is in the process of exiting its competitive energy businesses (NU Enterprises) to focus on its regulated Utility Group operations. Significant divestitures occurred during and immediately following the quarter, including the sale of the retail marketing business and energy services subsidiaries.
Key Financial Metrics
| Metric | Q1 2006 | Q1 2005 |
|---|---|---|
| Operating Revenues | $2,147.4 million | $2,233.0 million |
| Net Loss | $(10.1) million | $(117.7) million |
| Loss Per Share (Diluted) | $(0.07) | $(0.91) |
| Operating Cash Flows | $42.7 million | $189.1 million |
| Capital Expenditures | $203.8 million | $166.8 million |
| Total Assets | $12,134.6 million | $12,569.1 million |
| Long-Term Debt | $2,700.0 million | $3,027.3 million |
| Cash and Cash Equivalents | $36.3 million | $45.8 million |
Note: Margins are not explicitly stated as a percentage in the filing; however, Operating Income was $7.4 million in Q1 2006 compared to an Operating Loss of $(126.2) million in Q1 2005.
Material Changes Versus Prior Period
- Significant Improvement in Net Loss: The consolidated net loss narrowed from $117.7 million in Q1 2005 to $10.1 million in Q1 2006. This improvement is primarily due to the absence of massive mark-to-market losses ($188.9 million) recorded in Q1 2005 related to the decision to exit the wholesale marketing business.
- Utility Group Performance: The regulated Utility Group generated net income of $54.6 million in Q1 2006, compared to $53.6 million in Q1 2005. Transmission earnings increased due to higher investment bases, while distribution earnings were impacted by milder weather reducing sales volumes.
- NU Enterprises Losses: NU Enterprises reported a net loss of $62.6 million in Q1 2006, compared to $167.4 million in Q1 2005. The 2006 loss includes a $39.1 million after-tax charge to write down the retail marketing business to fair value less cost to sell.
- Cash Flow Decline: Operating cash flows decreased by $146.4 million year-over-year, driven by higher regulatory refunds to ratepayers and a $55 million federal income tax payment related to the 2005 tax return.
Guidance, Outlook, and Risks
- Earnings Guidance: NU projects 2006 combined earnings for the Utility Group and parent company to be between $1.09 and $1.22 per share. No consolidated earnings guidance is provided for NU Enterprises due to the uncertainty of the exit process.
- Divestiture Progress:
- Retail Marketing: Signed an agreement on May 1, 2006, to sell the retail marketing business to Amerada Hess Corporation, with a closing expected around June 1, 2006. NU will pay approximately $44 million to the buyer.
- Energy Services: Completed the sale of SESI on May 5, 2006, incurring a pre-tax charge of approximately $6 million.
- Competitive Generation: Indicative bids received in April 2006; sale expected to close by the end of 2006.
- Regulatory and Environmental Risks:
- PSNH Environmental Compliance: New Hampshire legislation requires mercury emission reductions by 2013. PSNH estimates compliance costs at approximately $250 million for wet scrubber technology, which it expects to recover from customers.
- FERC Proceedings: Ongoing proceedings regarding decommissioning cost escalators for Connecticut Yankee Atomic Power Company (CYAPC) and Yankee Atomic Electric Company (YAEC) could impact future rate recoveries.
- Con Edison Litigation: NU is involved in litigation regarding a failed 1999 merger. Con Edison claims damages of at least $314 million, while NU claims $32 million in costs. A motion for partial summary judgment was filed in April 2006.
- Liquidity and Credit Risk: NU maintains approximately $900 million in unused borrowing capacity. However, a downgrade of NU's credit rating to sub-investment grade could trigger collateral calls of approximately $413 million from Select Energy counterparties.
Investor Verification Checklist
- Divestiture Closing Dates: Verify the actual closing dates and final purchase prices for the retail marketing business (Amerada Hess) and the competitive generation assets, as these impact cash flows and final charges.
- Regulatory Rate Cases: Monitor the outcomes of pending rate cases for CL&P, PSNH, and WMECO, particularly regarding the recovery of transmission costs and the impact of the Forward Capacity Market (FCM) settlement.
- Environmental Compliance Costs: Track the final design and cost estimates for PSNH's mercury scrubber project to ensure the $250 million estimate remains accurate and recoverable.
- Con Edison Litigation Status: Review the court's decision on NU's motion for partial summary judgment regarding Con Edison's $314 million damage claim.
- Wholesale Contract Exit: Assess the financial impact of exiting remaining wholesale contracts, specifically the long-term New York obligation expiring in 2013, which carries load and price volatility risks.