Business Context and Reporting Period
Company: Northeast Utilities (NU) and its subsidiaries (The Connecticut Light and Power Company, Public Service Company of New Hampshire, Western Massachusetts Electric Company, Northeast Generation Company).
Reporting Period: Fiscal year ended December 31, 2001.
Overview: NU operates a regulated utility system providing electric and natural gas service in Connecticut, New Hampshire, and western Massachusetts. The 2001 period was defined by significant industry restructuring, the divestiture of nuclear generation assets, and the termination of a proposed merger with Consolidated Edison (Con Edison).
Key Financial Metrics
Revenue and Profit: The filing text does not provide consolidated revenue or net income figures for the NU system in the narrative sections; these are incorporated by reference from the Annual Report to Shareholders. However, specific subsidiary data is noted:
- Select Energy (Competitive): Generated over $3 billion in revenue in 2001 (up from $1.9 billion in 2000) and contributed $5 million to consolidated earnings before extraordinary items.
- NU Parent Company: Reported earnings of $243.5 million for 2001, driven largely by a $147.9 million gain related to the sale of Millstone units and equity in earnings of subsidiaries.
Debt and Liquidity:
- Total System Debt: Decreased to $2.7 billion as of December 31, 2001, from $3.8 billion in 2000.
- Debt Reduction: NU retired $1.3 billion of debt and preferred stock in 2001 using proceeds from Rate Reduction Certificates (RRCs), Rate Reduction Bonds (RRBs), and the sale of Millstone units.
- Dividends: Paid common dividends totaling $60.9 million in 2001 ($0.45 per share quarterly), an increase from $57.4 million in 2000.
- Capitalization: NU's consolidated common equity ratio was greater than 30% as of December 31, 2001.
Material Changes vs. Prior Period
- Merger Termination: The proposed merger with Con Edison was effectively terminated in March 2001 after Con Edison refused to close. NU subsequently filed a lawsuit seeking damages in excess of $1 billion.
- Asset Divestiture: Sold Millstone Units 1, 2, and 94% of Unit 3 to Dominion Nuclear Connecticut, Inc. for approximately $1.3 billion. This transaction significantly reduced debt and generated a substantial gain.
- Restructuring Implementation: Public Service Company of New Hampshire (PSNH) implemented full retail competition on May 1, 2001. Connecticut and Massachusetts subsidiaries continued to recover stranded costs through securitization.
- Competitive Growth: Select Energy revenues increased approximately 55% year-over-year due to contract renewals and new customers, despite volatile energy markets.
- Accounting Change: The company noted the upcoming adoption of FASB Statement No. 142 (Goodwill) effective January 1, 2002, which will eliminate goodwill amortization, potentially reducing annual expenses by approximately $9 million.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance:
- 2002 Capital Requirements: Estimated at $652 million, including $593 million for construction and $51 million for cash sinking funds.
- Financing Plans: NU expects to issue $263 million in long-term debt in April 2002 to replace maturing notes. PSNH sold $50 million in RRBs in January 2002.
- Asset Sales: Management expects the sale of NU's interests in the Seabrook nuclear plant to occur by the end of 2002. The sale of Vermont Yankee is scheduled to close in the first half of 2002.
Risks and Contingencies:
- Regulatory Risk: Ongoing disputes regarding standard offer rates in Connecticut and potential over-earnings investigations. The Connecticut DPUC rejected a request to raise standard offer rates in late 2001.
- Legal Proceedings: Significant litigation pending against Con Edison regarding the failed merger. Other proceedings include environmental lawsuits regarding Millstone Station and disputes over Installed Capability (ICAP) charges.
- Environmental Liabilities: Recorded liability for environmental remediation costs was approximately $46.2 million for 47 sites, including former manufactured gas plants.
- Energy Market Volatility: Select Energy faces risks from volatile wholesale energy prices and potential losses on fixed-price contracts if market prices fall below contract rates.
Investor Verification Checklist
- Con Edison Litigation: Verify the status and potential financial impact of the breach of contract lawsuit against Con Edison.
- Seabrook and Vermont Yankee Sales: Confirm the closing dates and final proceeds from the sales of these nuclear assets, which are critical to debt reduction strategies.
- Stranded Cost Recovery: Monitor regulatory decisions in Connecticut and New Hampshire regarding the recovery of stranded costs and the viability of standard offer supply contracts.
- Goodwill Impairment: Review the results of the goodwill impairment study required under the new accounting standard (FAS 142) effective in 2002.
- Environmental Reserves: Assess the adequacy of the $46.2 million reserve for environmental remediation, particularly regarding former manufactured gas plant sites.