Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2006, for Northeast Utilities (NU) and its wholly-owned subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), Western Massachusetts Electric Company (WMECO), and Yankee Gas Services Company. NU is a public utility holding company primarily engaged in regulated energy delivery, serving approximately 1.9 million electric customers and 200,000 gas customers across Connecticut, New Hampshire, and western Massachusetts. A significant strategic milestone in 2006 was the substantial exit from competitive energy businesses, including the sale of NU Enterprises' generation assets and wholesale marketing operations.
Key Financial Metrics
Consolidated financial statements for the full system are incorporated by reference from the Annual Report to Shareholders; however, specific parent company and segment data are disclosed in the filing.
- Parent Company Earnings: Northeast Utilities (Parent) reported earnings of $470.6 million for 2006, compared to a loss of $253.5 million in 2005. This resulted in basic earnings per share of $3.06.
- Dividends: NU paid common dividends totaling $112.7 million in 2006, an increase from $87.6 million in 2005.
- Debt: Total debt for NU and subsidiaries (excluding rate reduction bonds) was approximately $3.0 billion as of December 31, 2006.
- Liquidity: NU maintained a $500 million parent revolving credit facility and a joint $400 million facility for subsidiaries. No borrowings were outstanding on these lines at year-end, though $67.5 million in letters of credit were issued.
- Capital Expenditures: Total capital expenditures for 2006 were approximately $946 million, with $466 million allocated to transmission projects.
- Segment Performance (Yankee Gas): Yankee Gas earned $11.9 million on operating revenues of $454 million, down from $17.3 million in 2005 due to milder weather.
Material Changes vs. Prior Period
- Exit from Competitive Business: NU completed the sale of its competitive generation assets (Northeast Generation Company and Mt. Tom plant) for $1.34 billion in November 2006. It also divested its retail marketing business and substantially exited wholesale marketing.
- Transmission Investment: Transmission capital expenditures increased significantly, totaling $465.5 million in 2006. The transmission rate base grew from approximately $600 million in 2005 to $1.1 billion in 2006.
- Regulatory Rate Changes:
- CL&P: Standard Service rates increased by approximately 7.8% effective January 1, 2007.
- PSNH: Delivery Service rates received a temporary increase of $24.5 million in July 2006, with a settlement agreement approved for a permanent increase of $37.7 million annualized starting July 2007.
- WMECO: A rate settlement approved a $1.0 million distribution rate increase effective January 1, 2007, with total rates averaging a 17.8% increase.
- Electric Sales: Retail kilowatt-hour sales for the NU system declined by 4.0% in 2006 compared to 2005, attributed to milder weather and customer migration to competitive suppliers.
Guidance, Outlook, and Risks
Outlook and Capital Program: NU projects total capital expenditures of approximately $1.2 billion for 2007, with a five-year (2007-2011) transmission capital program estimated at $2.5 billion. The transmission rate base is forecast to grow to $3.0 billion by the end of 2011.
Management Commentary: Management emphasizes the successful transition to a regulated utility model. The focus is on maintaining reliability, executing the transmission build-out, and managing the exit from remaining competitive obligations.
Risks and Contingencies:
- Regulatory Risk: Uncertainty regarding the recovery of prudently incurred costs and potential changes in regional transmission cost allocation rules post-2010.
- Environmental Compliance: Significant costs are anticipated for compliance with air quality regulations, including a projected $250 million investment for a scrubber at PSNH's Merrimack Station to reduce mercury emissions by 2013.
- Legal Proceedings:
- Con Edison Litigation: Ongoing dispute regarding the 1999 merger agreement; NU seeks damages in excess of $1 billion, while Con Edison claims at least $314 million.
- Nuclear Decommissioning: A settlement regarding Connecticut Yankee decommissioning costs was approved by FERC, revising the estimate to $642.9 million.
- Spent Nuclear Fuel: The Court of Federal Claims ruled the DOE liable for damages to Yankee Companies totaling approximately $143 million through 2001/2002, though the DOE has appealed.
- Environmental Remediation: Recorded liability for environmental remediation costs is approximately $26.8 million, primarily related to former Manufactured Gas Plant (MGP) sites.
Investor Verification Checklist
- Verify the final settlement terms and payment schedule for the Con Edison merger litigation, which involves potential damages exceeding $1 billion.
- Confirm the regulatory approval status and cost recovery mechanisms for the $2.5 billion transmission capital program planned for 2007-2011.
- Monitor the outcome of the DOE appeal regarding spent nuclear fuel damages and the timing of any refunds to ratepayers.
- Review the final audit results of Yankee Gas' Purchased Gas Adjustment (PGA) clause charges, where up to $11 million in previously recovered revenues are under review.
- Assess the impact of the Regional Greenhouse Gas Initiative (RGGI) and state-specific mercury emission laws on future capital requirements and operating costs.