Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2004, 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 operates through two primary segments: the Utility Group (regulated electric and gas distribution) and NU Enterprises (competitive merchant energy and energy services). NU Enterprises includes Select Energy, Northeast Generation Company (NGC), and related subsidiaries.
Key Financial Metrics
| Metric | Q1 2004 | Q1 2003 |
|---|---|---|
| Operating Revenues | $1,838.3 million | $1,584.2 million |
| Net Income | $67.4 million | $60.2 million |
| Earnings Per Share (Diluted) | $0.53 | $0.47 |
| Operating Cash Flow | $256.2 million | $125.7 million |
| Capital Expenditures | $137.8 million | $96.8 million |
| Total Assets | $11,538.8 million | $11,308.9 million |
| Long-Term Debt | $2,564.7 million | $2,481.3 million |
| Cash & Equivalents | $76.1 million | $37.2 million |
Note: NU Enterprises earnings were $18.8 million in Q1 2004 compared to $5.2 million in Q1 2003. Utility Group earnings were $54.8 million in Q1 2004 compared to $59.4 million in Q1 2003.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased by $254 million (16%) driven by higher NU Enterprises merchant energy revenues ($183 million increase) and higher Utility Group retail electric rates and sales.
- Profitability: Net income rose 12% to $67.4 million. The increase was primarily due to improved results at NU Enterprises, specifically Select Energy's wholesale and retail businesses.
- Operating Expenses: Total operating expenses increased by $245 million. Fuel and purchased power costs rose $211 million due to higher wholesale activity at NU Enterprises and higher purchased power costs for the Utility Group.
- Cash Flow: Operating cash flow more than doubled to $256.2 million, largely due to increases in working capital items, specifically accounts payable and accrued taxes.
- Segment Performance:
- NU Enterprises: Earnings surged to $18.8 million from $5.2 million. Select Energy's retail business turned a loss of $1.9 million in 2003 into a profit of $2.3 million.
- Utility Group: Earnings declined to $54.8 million from $59.4 million due to higher depreciation and pension expenses, partially offset by a 2.7% increase in retail electric sales.
Guidance, Outlook, and Risks
Guidance and Outlook
- 2004 Consolidated Earnings: NU projects earnings between $1.20 and $1.40 per share.
- Utility Group: Expected to contribute $1.08 to $1.20 per share.
- NU Enterprises: Expected to contribute $0.22 to $0.30 per share ($28 million to $38 million). Management expects results to be in the mid-to-upper end of this range based on Q1 performance.
- Merchant Energy Segment: Projected earnings of $24 million to $31 million. Management notes that Q2 2004 earnings will likely be significantly lower than Q1 due to the expiration of high-priced wholesale contracts.
- Capital Spending: 2004 capital expenditures are projected at $701 million, though delays in transmission projects could lower this figure.
Risks and Contingencies
- Rating Downgrades: On April 14, 2004, Standard & Poor's (S&P) lowered NU's outlook to "negative" from "stable" and downgraded NGC's bonds to BB+ (non-investment grade) from BBB-. This was based on increased competitive exposure and projected capital expenditures.
- Regulatory Proceedings:
- LMP Costs: A settlement regarding $186 million in incremental Locational Marginal Pricing (LMP) costs was filed with FERC. NU recorded a $60 million pre-tax loss in 2003 related to this; final approval is expected in H1 2004.
- Nuclear Decommissioning: NU's share of Connecticut Yankee's decommissioning costs increased by approximately $191 million. Recovery of these costs from customers via FERC proceedings is not guaranteed.
- Rate Cases: Pending rate cases for CL&P, PSNH, and Yankee Gas could impact future earnings and cash flows.
- Legal Proceedings: NU is involved in litigation regarding retirement plan modifications for former employees and claims related to Enron/CRRA transactions.
- Market Risk: Select Energy faces volatility in energy commodity prices. A 10% change in forward market prices could impact the fair value of the wholesale/retail portfolio by $14.3 million to $16.6 million.
Investor Verification Checklist
- Rating Impact: Verify the specific impact of the S&P downgrade on NGC's ability to secure contracts and the cost of capital for NU Enterprises.
- Q2 Earnings Profile: Confirm the magnitude of the expected earnings decline in Q2 2004 for the merchant energy segment due to contract expirations.
- FERC Approvals: Monitor the status of the LMP cost settlement and the Connecticut Yankee decommissioning cost recovery applications.
- Capital Expenditure Delays: Assess the likelihood of transmission project delays reducing the $701 million capital spending projection.
- SEC Guarantee Limits: Track the approval status of NU's application to increase SEC allowable guarantees for NU Enterprises from $500 million to $750 million.