Business Context and Reporting Period
Company: Northeast Utilities (NU) and subsidiaries (The Connecticut Light and Power Company, Public Service Company of New Hampshire, Western Massachusetts Electric Company, North Atlantic Energy Corporation, and Yankee Energy System, Inc.).
Reporting Period: Fiscal year ended December 31, 2000.
Overview: NU is a major electric utility system serving approximately 30% of New England's electric needs. The 2000 fiscal year was defined by significant industry restructuring in Connecticut, Massachusetts, and New Hampshire, the acquisition of Yankee Energy System, Inc. (Yankee) in March 2000, and the eventual collapse of a proposed merger with Consolidated Edison, Inc. (Con Edison) in March 2001.
Key Financial Metrics
| Metric | 2000 | 1999 |
|---|---|---|
| Operating Revenues | $5,876.6 million | $4,471.3 million |
| Operating Income | $464.8 million | $344.5 million |
| Income Before Extraordinary Loss | $205.3 million | $34.2 million |
| Extraordinary Loss (Net of Tax) | ($233.9 million) | - |
| Net (Loss)/Income | ($28.6 million) | $34.2 million |
| Diluted EPS (Income Before Extraordinary) | $1.45 | $0.26 |
| Diluted EPS (Net Loss) | ($0.20) | $0.26 |
| Total Debt (Short-term + Long-term) | $3.8 billion | $3.3 billion |
| Cash and Cash Equivalents | $200.0 million | $255.2 million |
| Operating Cash Flow | $578.4 million | $614.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 31% to a record $5.9 billion, driven primarily by a 300% increase in competitive energy subsidiary revenues (Select Energy) and the acquisition of Yankee. This offset retail rate reductions in Connecticut and New Hampshire.
- Extraordinary Loss: The company reported a net loss of $28.6 million due to an extraordinary charge of $233.9 million. This was primarily caused by a $225 million after-tax write-off of stranded costs by PSNH under a New Hampshire restructuring settlement and a $19.7 million loss related to the discontinuation of SFAS No. 71 for Holyoke Water Power Company assets.
- Acquisition: NU acquired Yankee Energy System, Inc. for $478 million (cash and stock) plus assumed debt, adding Connecticut's largest natural gas distribution company to its portfolio.
- Divestitures: NU sold fossil and hydroelectric generation assets in Connecticut and Massachusetts to affiliated and unaffiliated companies. An agreement was reached to sell the Millstone nuclear units to Dominion Resources for approximately $1.3 billion, expected to close in March 2001.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2001 Earnings Guidance: Management projects earnings between $1.40 and $1.60 per share for 2001, excluding significant nonrecurring gains and losses.
- Restructuring Implementation: NU expects to complete securitization of stranded costs for CL&P, PSNH, and WMECO in 2001, generating over $5 billion in cash proceeds between 1999 and 2002. These proceeds will be used to repay debt, buy down high-cost power contracts, and return capital to the parent company.
- Con Edison Merger: The proposed merger with Con Edison was terminated in March 2001 after Con Edison refused to close on agreed terms. NU filed suit seeking damages in excess of $1 billion.
Risks and Contingencies
- Regulatory Risk: Ongoing litigation and regulatory proceedings regarding stranded cost recovery, rate reductions, and the timing of securitization bonds in Connecticut, New Hampshire, and Massachusetts.
- Market Risk: Competitive energy subsidiaries face significant exposure to volatile electricity and natural gas prices. Select Energy holds fixed-price contracts for standard offer service which could result in losses if market prices rise significantly.
- Nuclear Operations: Risks associated with the sale of Millstone units, including the discovery of two missing irradiated fuel rods at Millstone 1, and the potential for decommissioning cost overruns.
- Legal Proceedings: Significant litigation regarding the Con Edison merger breach and various environmental and regulatory disputes.
Investor Verification Checklist
- Con Edison Litigation Outcome: Verify the status and potential recovery amount from the lawsuit against Con Edison for breach of the merger agreement.
- Millstone Sale Closing: Confirm the closing date of the $1.3 billion sale of Millstone units to Dominion and the transfer of decommissioning funds.
- Securitization Timing: Monitor the issuance of rate reduction bonds in Connecticut, New Hampshire, and Massachusetts to ensure projected cash flows for debt reduction are realized.
- Competitive Energy Exposure: Assess the impact of rising wholesale energy prices on Select Energy's fixed-price standard offer contracts and overall profitability.
- Missing Fuel Rods: Track the investigation into the missing fuel rods at Millstone 1 and any associated liability or regulatory penalties.