Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2002, 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 regulated electric and gas utilities alongside competitive energy subsidiaries (Select Energy, NGC, etc.).
Key Financial Metrics (Nine Months Ended Sept 30, 2002)
| Metric | 2002 (9 Months) | 2001 (9 Months) |
|---|---|---|
| Operating Revenues | $3,770.1 million | $4,669.7 million |
| Net Income | $96.1 million | $193.5 million |
| Earnings Per Share (Diluted) | $0.74 | $1.41 |
| Operating Cash Flow | $467.1 million | $399.2 million |
| Cash and Equivalents (Sept 30) | $70.7 million | $96.7 million |
| Total Debt (Long-term + Current) | $2,840.6 million | $2,633.5 million |
| Competitive Energy Loss | ($39.9 million) | Break-even (excl. accounting change) |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 19% ($900 million) primarily due to lower wholesale marketing revenues at competitive subsidiaries and lower regulated wholesale revenues following the 2001 sale of Millstone units.
- Earnings Drop: Net income fell 50% ($97 million). The decline is attributed to weaker performance at competitive energy subsidiaries (losses of $39.9 million vs. break-even in 2001) caused by mild weather, natural gas trading losses, and low hydroelectric flows.
- Regulated Performance: Regulated electric subsidiaries benefited from an extremely hot summer, with third-quarter residential sales up 10.9%. However, full-year earnings were impacted by the absence of 2001 gains from the Millstone sale.
- Accounting Reclassification: Revenues and expenses for competitive energy trading were reclassified on a net basis (reducing reported revenue by $1.2 billion for the first six months) with no impact on net income.
Guidance, Outlook, and Risks
- 2002 Guidance: NU estimates full-year earnings between $1.10 and $1.30 per share. This assumes Q4 earnings of $0.36–$0.56 per share, including a ~$10 million gain from the Seabrook sale, offset by projected competitive energy losses of $10–$20 million.
- 2003 Outlook: Earnings are projected between $1.10 and $1.30 per share. This assumes lower regulated earnings (due to absence of Seabrook gains and lower pension income) but improved competitive energy results (modest profitability in trading, break-even in retail).
- Seabrook Sale: On November 1, 2002, NU sold its 40.04% interest in Seabrook to FPL Group for ~$384 million. Proceeds will repay debt, return equity, and offset stranded costs.
- Key Risks:
- Counterparty Credit: Significant exposure to NRG Energy, which is in default on debt and below investment grade. Disputes exist regarding congestion charges and station service payments.
- Regulatory Uncertainty: Outcomes of dockets in CT, NH, and MA regarding stranded cost recovery remain uncertain.
- Market Volatility: Competitive subsidiaries face risks from energy price volatility and reduced market liquidity.
Investor Verification Checklist
- Seabrook Proceeds Allocation: Verify the final distribution of the ~$384 million sale proceeds among debt repayment, tax payments, and stranded cost offsets.
- NRG Energy Exposure: Assess the financial impact of NRG's default on CL&P's standard offer service contract and the collectibility of disputed amounts (~$12 million).
- Competitive Energy Turnaround: Monitor Q4 results to confirm if competitive subsidiaries limit losses to the projected $10–$20 million range.
- Regulatory Dockets: Track decisions on stranded cost recovery in Connecticut, New Hampshire, and Massachusetts, which could impact future earnings.
- Accounting Changes: Confirm the impact of the rescission of EITF 98-10 and the adoption of SFAS 133 on future energy trading reporting.