Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2002, for Northeast Utilities (NU) and its primary subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The NU system provides regulated electric service to over 1.8 million customers in Connecticut, New Hampshire, and western Massachusetts, and natural gas service to approximately 191,000 customers in Connecticut via Yankee Gas. The reporting period marked the final year of a four-year process to divest most regulated generating assets, with CL&P and WMECO transitioning to pure transmission and distribution companies.
Key Financial Metrics
Consolidated revenue, profit, and cash flow figures for the NU system are not explicitly stated in the provided text; however, specific subsidiary and segment data are available.
- Competitive Segment Performance: NU Enterprises, Inc. (NUEI) and its affiliates reported aggregate revenues of approximately $1.7 billion in 2002, down from $2.1 billion in 2001. The segment incurred a loss of $54.1 million in 2002, compared to earnings of approximately $5 million in 2001.
- Select Energy (Wholesale/Retail): Reported revenues of $1.5 billion in 2002 (down from $1.9 billion in 2001). The retail marketing business lost approximately $28 million, and the energy trading business incurred an after-tax loss of approximately $24 million due to a short position in natural gas.
- Debt and Liquidity: Total NU system debt (excluding securitized stranded costs) was $2.4 billion as of December 31, 2002, a decrease from $2.7 billion in 2001. The system maintained a leverage ratio of 50% at the parent level. NU paid common dividends totaling $67.8 million in 2002.
- Asset Sales: The sale of the Seabrook nuclear unit generated approximately $384 million in cash proceeds, which were primarily used to pay down short-term debt.
Material Changes vs. Prior Period
- Asset Divestitures: NU completed the sale of its 35.98% interest in the Seabrook nuclear unit to FPL Group in November 2002. This followed the 2001 sale of the Millstone nuclear units to Dominion.
- Competitive Business Losses: The competitive energy segment shifted from profitability in 2001 to a significant loss in 2002, driven by unfavorable weather (warm winter), unfavorable retail supply contracts, and trading losses.
- Regulatory Settlements: WMECO reached a settlement on transition charge reconciliations, increasing 2002 earnings by approximately $5.7 million. PSNH received approval to recover approximately $200 million in deferred fuel costs.
- Acquisitions: PSNH announced an agreement to acquire the franchise and electric system of Connecticut Valley Electric Company (CVEC) for approximately $30 million total consideration, expected to close in 2004.
Guidance, Outlook, and Risks
Outlook and Guidance:
- 2003 Financing: The NU system projects aggregate capital requirements of approximately $697 million for 2003, with construction expenditures estimated at $640 million.
- Competitive Segment: Management expects Select Energy's wholesale marketing business to be profitable in 2003 and the retail marketing business to break even. The trading business is projected to be modestly profitable.
- Rate Cases: CL&P expects to file a distribution rate case in mid-2003 for rates effective January 2004. PSNH delivery rates are fixed until February 1, 2004.
- NRG Energy Credit Risk: Significant concern exists regarding the financial viability of NRG Power Marketing (NRG-PM), a key supplier for CL&P's standard offer service. NRG's credit rating was downgraded to below investment grade, and an involuntary bankruptcy case was filed against NRG in November 2002. CL&P is withholding payments and monitoring the risk of default.
- Transmission Congestion: The implementation of Standard Market Design (SMD) in New England on March 1, 2003, is expected to increase transmission congestion costs, with CL&P potentially responsible for approximately 80% of these costs in Connecticut.
- Legal Proceedings: NU is involved in litigation with Con Edison regarding the failed merger (seeking ~$1.2 billion in damages) and disputes with NRG regarding station service charges ($13.3 million). Environmental remediation liabilities are recorded at approximately $42 million.
- Nuclear Decommissioning: Estimated decommissioning costs for the Yankee Companies' units increased by approximately $380 million over prior estimates, requiring future regulatory filings for rate recovery.
Investor Verification Checklist
- NRG-PM Solvency: Verify the current status of NRG Energy's bankruptcy proceedings and the likelihood of CL&P recovering stranded costs if NRG-PM defaults on its standard offer obligations.
- SMD Cost Impact: Confirm the actual financial impact of the Standard Market Design implementation on CL&P's 2003 earnings and the regulatory mechanism for cost recovery.
- Con Edison Litigation: Monitor the status of the lawsuit against Con Edison for breach of the merger agreement and the potential for a $1.2 billion recovery.
- Decommissioning Cost Recovery: Track the FERC approval process for the increased decommissioning cost estimates for the Yankee nuclear units.
- Competitive Segment Turnaround: Assess whether Select Energy achieves its 2003 targets for profitability in wholesale marketing and break-even performance in retail marketing.