Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2004, 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 distribution/transmission) and NU Enterprises (competitive merchant energy and energy services). NU continues to project 2004 earnings between $1.20 and $1.40 per share.
Key Financial Metrics (Six Months Ended June 30, 2004)
| Metric | 2004 (6 Months) | 2003 (6 Months) | Change |
|---|---|---|---|
| Operating Revenues | $3,363.0 million | $2,914.2 million | +15% |
| Net Income | $90.3 million | $87.1 million | +4% |
| Earnings Per Share (Diluted) | $0.71 | $0.69 | +$0.02 |
| Operating Cash Flow | $508.0 million | $211.7 million | +139% |
| Capital Expenditures | $311.6 million | $234.0 million | +33% |
| Cash & Equivalents | $75.3 million | $37.2 million (Dec 31, 2003) | +102% |
| Total Assets | $11,513.8 million | $11,256.8 million (Dec 31, 2003) | +2% |
Segment Performance (6 Months 2004 vs 2003):
- Utility Group: Net income increased to $80.5 million from $73.6 million, driven by a 3.7% increase in retail electric sales and rate increases.
- NU Enterprises: Net income increased to $21.7 million from $17.1 million, primarily due to higher merchant energy margins and volumes.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues rose $449 million (15%) year-over-year. This was driven by a $250 million increase in NU Enterprises revenues (due to higher electric/gas prices and volumes) and a $130 million increase in electric distribution revenues (due to rate increases and higher sales volumes).
- Expense Increases: Fuel and purchased power expenses increased $359 million (21%) due to higher wholesale costs at NU Enterprises and higher standard offer service rates for the Utility Group.
- Cash Flow Surge: Operating cash flow more than doubled to $508 million, largely due to changes in working capital, specifically a $134 million increase in accounts payable and a $79 million decrease in receivables/unbilled revenues.
- Investment Write-downs: Results included an after-tax write-down of $2.4 million ($0.02 per share) related to an investment in a fuel cell developer.
Guidance, Outlook, and Risks
Outlook and Guidance
- 2004 Earnings: NU maintains a full-year earnings projection of $1.20 to $1.40 per share.
- Capital Spending: 2004 capital expenditures are projected to total $674.2 million, down from the original budget of $738 million due to delays in transmission projects.
- Dividends: The quarterly dividend was increased by 8.3% to $0.1625 per share, payable September 30, 2004.
Regulatory and Legal Contingencies
- Connecticut Yankee Decommissioning: NU's share of increased decommissioning costs for the Connecticut Yankee plant is approximately $194 million. A filing with FERC seeks to increase annual collections from $16.7 million to $93 million starting in 2005. Recovery is not guaranteed and is subject to regulatory review.
- Con Edison Merger Litigation: NU is pursuing damages in excess of $1 billion against Con Edison for breach of a 1999 merger agreement. The case is on appeal to the Second Circuit Court of Appeals; no trial date is set.
- CL&P Refunds: CL&P is required to refund $88.5 million to customers over seven months starting October 2004 and paid $83 million to suppliers regarding LMP costs. Management expects no difficulty funding these requirements.
- Transmission Rate Case: A settlement allows transmission to implement formula-based rates with an 11.0% ROE pending FERC approval. This resulted in a $1.8 million regulatory liability.
Investor Verification Checklist
- Decommissioning Cost Recovery: Verify the status of the FERC proceeding regarding the $194 million increase in Connecticut Yankee decommissioning costs and the likelihood of full recovery.
- Con Edison Litigation: Monitor the Second Circuit Court of Appeals decision regarding the merger breach claim and the definition of proper beneficiaries for damages.
- CL&P Liquidity: Confirm the impact of the $88.5 million customer refund and $83 million supplier payment on CL&P's cash position and credit lines.
- Capital Project Delays: Assess the timeline for delayed transmission projects (e.g., Bethel-Norwalk, Norwalk-Middletown) and their effect on the revised $674.2 million capital budget.
- Merchant Energy Margins: Review Select Energy's ability to maintain gross margin targets given the volatility in wholesale energy prices and the concentration of counterparty credit risk.