Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2007, 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 primarily as a regulated utility holding company with segments for electric distribution, gas distribution, transmission, and a winding-down competitive energy business (NU Enterprises).
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Operating Revenues | $1,704.3 million | $2,147.4 million |
| Operating Income | $155.4 million | $7.7 million |
| Net Income | $75.1 million | ($10.1 million) Loss |
| Earnings Per Share (Diluted) | $0.49 | ($0.07) Loss |
| Cash and Cash Equivalents | $214.7 million | $481.9 million (Dec 31, 2006) |
| Long-Term Debt | $3,263.9 million | $2,960.4 million (Dec 31, 2006) |
| Capital Expenditures (Cash) | $227.7 million | $203.8 million |
Segment Performance (Net Income):
- Regulated Companies: $64.1 million (Q1 2007) vs. $54.6 million (Q1 2006).
- NU Enterprises: $4.8 million (Q1 2007) vs. ($62.6 million) loss (Q1 2006).
- Parent and Affiliates: $6.2 million (Q1 2007) vs. ($2.1 million) loss (Q1 2006).
Material Changes vs. Prior Period
The company reported a significant turnaround from a net loss in Q1 2006 to a net income of $75.1 million in Q1 2007. Key drivers include:
- Revenue Decline: Operating revenues decreased by $443 million (21%) primarily due to the exit from significant components of the competitive businesses (NU Enterprises) in late 2006.
- Expense Reduction: Operating expenses decreased by $591 million (28%), driven largely by a $474 million reduction in fuel and purchased power costs associated with the divestiture of competitive generation and marketing assets.
- Discontinued Operations: Q1 2006 included a $59.9 million pre-tax charge to write down the retail marketing business to fair value less cost to sell. Q1 2007 included a $1.9 million loss on the sale of discontinued operations.
- Cash Flow: Net cash flows from operating activities were negative $266.6 million in Q1 2007, compared to positive $42.7 million in Q1 2006. This decline was primarily due to $398.5 million in federal and state income tax payments related to the 2006 sale of competitive generation assets. Excluding these tax payments, operating cash flow was $131.9 million.
Guidance, Outlook, and Risks
Guidance and Outlook:
- 2007 Earnings: NU projects consolidated earnings between $1.30 and $1.55 per share. This guidance excludes the impact of marking-to-market remaining wholesale energy contracts.
- Segment Guidance: Regulated companies are projected to earn $0.80–$0.90 per share (distribution/generation) and $0.50–$0.60 per share (transmission). NU Enterprises is projected to be breakeven.
- Capital Expenditures: Forecasted at approximately $1.2 billion for 2007, with significant investment in transmission infrastructure.
Risks and Contingencies:
- Regulatory Matters: Pending rate cases for Yankee Gas (net revenue increase of $37.2 million requested) and CL&P (distribution rate case expected mid-2007). PSNH reached a settlement agreement for a $37.7 million annualized increase, awaiting final order.
- Legal Proceedings: Ongoing litigation with Consolidated Edison, Inc. regarding a failed merger. NU claims ~$32 million in costs; Con Edison claims damages of at least $314 million.
- Environmental: Potential additional remediation costs at a Holyoke Water Power Company (HWP) coal tar site. Current reserve is $1.2 million, but costs could be material.
- Market Risk: NU Enterprises holds wholesale derivative contracts with a net fair value liability of $96.9 million. A 10% increase in energy prices could result in a $12.5 million pre-tax decrease in fair value.
Investor Verification Checklist
- Tax Liability Resolution: Verify the status of the $398.5 million tax payment made in Q1 2007 related to the 2006 asset sale and confirm no further deferred tax obligations remain.
- Regulatory Approvals: Monitor the final decisions on the PSNH rate settlement and the Yankee Gas rate case, as these impact future revenue recovery.
- Wholesale Portfolio Exit: Track the progress of exiting NU Enterprises' remaining wholesale contracts, which currently carry a $96.9 million net liability and expose the company to commodity price volatility.
- Capital Project Costs: Review the cost estimates and timelines for major transmission projects (e.g., Middletown to Norwalk, Glenbrook Cables) to ensure they remain within the $1.2 billion 2007 budget.
- Con Edison Litigation: Follow the status of the partial summary judgment motion regarding Con Edison's $314 million damage claim.