Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003, 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 in two primary segments: the Utility Group (regulated electric and gas utilities) and NU Enterprises (competitive energy businesses including Select Energy).
Key Financial Metrics (Nine Months Ended Sept 30, 2003)
| Metric | 2003 (9 Months) | 2002 (9 Months) |
|---|---|---|
| Operating Revenues | $5,200.3 million | $3,840.7 million |
| Net Income | $126.3 million | $96.1 million |
| Diluted EPS | $0.99 | $0.74 |
| Operating Cash Flow | $462.7 million | $472.3 million |
| Cash & Equivalents (Sept 30) | $118.1 million | $54.7 million (Dec 31, 2002) |
| Long-Term Debt | $2,505.2 million | $2,287.1 million (Dec 31, 2002) |
| Capital Expenditures | $386.0 million | $327.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased by $1.36 billion (35%) year-over-year. This was driven primarily by a $1.1 billion increase in NU Enterprises revenues due to higher wholesale sales volumes and the implementation of Standard Market Design (SMD) in New England.
- Profitability: Net income increased by $30.2 million (31%). NU Enterprises turned a loss of $38.7 million in 2002 into a profit of $24.0 million in 2003, driven by better margins and the absence of natural gas trading losses. Conversely, Utility Group net income decreased by $47.5 million due to the absence of Seabrook nuclear earnings and lower pension income.
- Accounting Change: A negative cumulative effect of accounting change of $4.7 million (after-tax) was recorded in Q3 2003 due to the adoption of FASB Interpretation No. 46 (FIN 46), requiring the consolidation of R. M. Services, Inc. (RMS).
- Unbilled Revenue Adjustment: A net positive after-tax earnings impact of $5.7 million was recorded in Q3 2003 following a validation of unbilled revenue estimates using the cycle method.
Guidance, Outlook, and Risks
Management Guidance
- 2003 Full Year: Forecasted earnings narrowed to $1.20 to $1.30 per share. This excludes potential losses from the LMP dispute.
- 2004 Full Year: Forecasted earnings range is $1.20 to $1.40 per share.
Key Risks and Contingencies
- LMP Dispute (Standard Market Design): A significant dispute exists regarding the responsibility for incremental Locational Marginal Pricing (LMP) costs (estimated at $90 million for Select Energy) arising from the March 2003 implementation of SMD. CL&P believes customers are responsible; suppliers argue otherwise. Resolution is expected in 2004. If suppliers are held liable, NU Enterprises' pre-tax earnings could be reduced by up to $71 million for the nine months ended Sept 30, 2003.
- NRG Energy Bankruptcy: NRG filed for Chapter 11 bankruptcy in May 2003. NU has exposures related to standard offer service contracts, station service, and congestion charges. A settlement agreement was reached in November 2003 regarding the standard offer contract, but legal proceedings continue regarding other costs.
- Regulatory Proceedings: Pending rate cases for CL&P and PSNH, and a FERC rate case for transmission tariffs, will impact future earnings. A final decision on CL&P's rate case is due December 15, 2003.
- Connecticut Yankee Decommissioning: The termination of the Bechtel contract for decommissioning the Connecticut Yankee nuclear plant may lead to significantly higher cost estimates, which would increase deferred contractual obligations.
Investor Verification Checklist
- LMP Cost Liability: Verify the status of the FERC administrative law judge decision regarding the $90 million LMP cost dispute and its potential impact on 2003/2004 earnings.
- NRG Settlement Finality: Confirm the approval of the NRG settlement agreement by the bankruptcy court and FERC to assess the resolution of the $7.9 million replacement power cost and future contract obligations.
- Regulatory Asset Recovery: Monitor the outcome of the CL&P and PSNH rate cases to ensure the recovery of regulatory assets, particularly those related to LMP costs and stranded costs.
- Connecticut Yankee Costs: Track the updated decommissioning cost estimates for the Connecticut Yankee plant following the Bechtel contract termination.
- FIN 46 Consolidation: Review the ongoing financial impact of consolidating RMS and any future variable interest entity (VIE) exposures.