Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2001, for Northeast Utilities (NU) and its wholly owned operating subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), Western Massachusetts Electric Company (WMECO), and competitive energy subsidiaries including Select Energy. The filing details the financial impact of the March 2001 sale of the Millstone nuclear units to Dominion Resources and the adoption of new accounting standards for derivatives (SFAS No. 133).
Key Financial Metrics (Six Months Ended June 30, 2001)
| Metric | 2001 (6 Months) | 2000 (6 Months) |
|---|---|---|
| Operating Revenues | $3,383.8 million | $2,797.3 million |
| Net Income | $158.9 million | $86.8 million |
| Diluted Earnings Per Share (EPS) | $1.14 | $0.62 |
| Operating Cash Flow | $215.3 million | $267.2 million |
| Long-Term Debt | $1,930.1 million | $2,029.6 million |
| Cash and Equivalents | $197.6 million | $301.6 million |
Note: Net Income includes a $22.4 million cumulative effect of accounting change related to SFAS No. 133. Excluding this charge, earnings were $181.3 million ($1.30 per share).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 21% ($586 million) year-over-year, driven primarily by a 50% increase in competitive energy subsidiary revenues ($441 million) and higher Yankee revenues ($144 million), partially offset by lower wholesale regulated revenues.
- Profitability: Net income increased 83% ($72 million). The improvement was aided by the sale of Millstone units, which generated a $1.2 billion cash inflow and a $124.8 million after-tax gain on PSNH's interests. Competitive energy subsidiaries earned $9.4 million (excluding accounting changes) compared to $3.5 million in 2000.
- Expense Variance: Fuel and purchased power expenses rose 37% ($577 million) due to higher sales volumes for Select Energy and increased purchased power costs. However, amortization of regulatory assets increased significantly ($693 million) due to the amortization of the gain on the Millstone sale.
- Capital Structure: Long-term debt decreased by approximately $100 million. The company utilized proceeds from the Millstone sale and securitization of stranded costs ($2.1 billion in rate reduction bonds) to buyout high-cost power contracts and retire debt.
Guidance, Outlook, and Risks
- 2001 Guidance: NU projects operating earnings between $1.35 and $1.50 per share for 2001, excluding nonrecurring items. This range is lower than previous guidance ($1.40–$1.60) due to a delay in share repurchases, resulting in a higher average share count.
- Share Repurchases: The Board authorized the repurchase of up to 15 million additional common shares by July 1, 2003. In Q2 2001, the company closed out 10.1 million shares under forward purchase arrangements, recording an $8 million gain.
- Dividends: A quarterly dividend of $0.125 per share was declared, a 25% increase from the previous $0.10 rate.
- Regulatory Risks:
- Connecticut: The DPUC ordered a $21.1 million write-off of CL&P stranded costs and increased amortization of regulatory assets, which will reduce earnings in the second half of 2001 and 2002.
- New Hampshire: Legislation delayed the sale of PSNH's fossil and hydroelectric generation assets until at least February 2004, extending transition service requirements.
- Market Risks: Competitive energy subsidiaries face commodity price risks. At June 30, 2001, the portfolio had a negative mark-to-market position, though management does not anticipate realization of this loss upon physical delivery.
- Legal Proceedings: Ongoing litigation includes a property tax dispute with the City of Meriden (court ruled in favor of NU/CL&P for $15.6 million refund, currently under appeal) and FERC proceedings regarding Installed Capability (ICAP) deficiency charges.
Investor Verification Checklist
- Millstone Sale Proceeds: Verify the utilization of the $1.2 billion cash proceeds from the Millstone sale, specifically the $1.1 billion used to buyout high-cost power contracts and debt retirements.
- Regulatory Asset Amortization: Confirm the impact of the Connecticut DPUC order requiring increased amortization of regulatory assets without corresponding revenue increases, which will pressure H2 2001 earnings.
- Derivative Accounting (SFAS 133): Review the $22.4 million cumulative effect charge and the $35.4 million net charge related to forward share repurchase contracts to understand non-cash impacts on earnings.
- Competitive Energy Exposure: Assess the negative mark-to-market position of Select Energy's trading portfolio and the sensitivity of earnings to energy price volatility.
- Debt Ratings: Note the upgrade of WMECO's unsecured debt rating to BBB+ by Fitch following the repayment of first mortgage bonds.