Why did NU report a net loss in 2000 when earnings before extraordinary items were positive?

The net loss of $28.6M reflects $233.9M in after-tax extraordinary charges. The largest was roughly $225M written off by PSNH under the New Hampshire Settlement Agreement, plus charges from discontinuing SFAS No. 71 for generation businesses at CL&P, WMECO and PSNH and a $19.7M charge at Holyoke Water Power. Income before these items was $205.3M, or $1.45 per diluted share.

What happened with the Consolidated Edison merger and what could it mean for shareholders?

Under the original terms, NU shareholders would have received a $25 base price in cash and Con Edison stock, plus $1 per share from the Millstone auction and about $0.10 per share per month after August 5, 2000. Assuming Con Edison stock averaged $36 to $46, shareholders would have received about $26.84 per share if the deal closed April 10, 2001. Con Edison refused to close on March 5, 2001, and both sides filed lawsuits in federal court in New York. NU has said it cannot predict the outcome. Investors should treat the litigation result as a major uncertainty.

How is NU positioned financially for 2001?

Management expects the Millstone sale to Dominion and securitization of stranded costs (CL&P about $1.45B, WMECO $155M, PSNH up to $670M) to reduce debt substantially and return equity to the parent. Common equity ratio at year-end was 35.1% against a 30% covenant, and the consolidated interest coverage ratio was 2.4x against a 2.0x covenant. Management guided 2001 EPS to $1.40 to $1.60 before significant nonrecurring items, but CL&P's earnings are expected to decline after the Millstone sale.

What are the main operating risks for Select Energy?

Select Energy supplies roughly half of CL&P's standard offer load at fixed prices through December 31, 2003, which accounted for about 26% of 2000 competitive energy revenue. Management says it partly hedges this through NGC purchases, 850 MW of Millstone and Seabrook output through 2001, and other supply contracts, but earnings would fall if supply costs rise above contract prices. The competitive energy segment contributed only $13.6M to 2000 earnings, so this exposure matters for NU's results.

What regulatory developments could affect earnings in 2001?

Several items are pending: a FERC order reinstating the $8.75/kW-month installed capacity charge effective April 1, 2001, after a revised decision cut NU's Q4 2000 revenue by $24.6M; the DPUC's decision on a possible interim rate decrease for CL&P (expected April 2001) after ROEs above authorized levels; a Yankee Gas rate case filing in July 2001; and New Hampshire's Supreme Court review window closing May 1, 2001. PSNH and NAEC are also expected to see significant earnings declines after restructuring takes effect.

ES 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 28, 2001. Cited figures are marked; the original filing is the authoritative source.

Northeast Utilities (NU) filed its 2000 annual Form 10-K on March 16, 2001 (combined with CL&P, PSNH, WMECO and NAEC) during a period of major uncertainty.

NU reported a 2000 net loss of $28.6 million^a, or $0.20 per diluted share, but earnings before extraordinary items were $205.3 million ($1.45 per share), compared with $34.2 million ($0.26) in 1999. The loss was driven by $233.9 million in after-tax extraordinary charges, mainly a roughly $225 million write-off of PSNH stranded costs under the New Hampshire Settlement Agreement and the discontinuation of SFAS No. 71 for generation assets. Revenues hit a record $5.9 billion, up 31%, largely from the Select Energy competitive energy business, which generated $1.9 billion in revenue.

The central investor issue is the failed merger with Consolidated Edison. Con Edison refused to close on the agreed terms on March 5, 2001, NU treated this as a breach, and both companies filed dueling lawsuits in the Southern District of New York (NU seeking damages above $1 billion^b). NU states it cannot predict the outcome.

The merger would have paid approximately $26.84^c per share under stated assumptions, so the outcome is a key valuation driver. Management guided 2001 earnings of $1.40 to $1.60 per share, excluding significant nonrecurring items. Balance sheet and restructuring activity is significant.

Management expects the Millstone nuclear sale to Dominion (about $1.3 billion^d, closing as early as end of March 2001) and securitization of stranded costs to return more than $5 billion of cash to the regulated companies between 1999 and 2002, used to reduce debt and return equity to the parent. Investment-grade ratings were restored by Moody's and S&P in January 2001. Risks remain, including the Select Energy standard offer contract exposure through 2003, an ISO FERC capacity-price reduction that cut Q4 2000 earnings by $0.10 per share, Millstone-related litigation, and pending New Hampshire and Connecticut regulatory proceedings.

02—Key points

Key Highlights

2000 net loss of $28.6M ($0.20/share) after $233.9M extraordinary charges; income before extraordinary items was $205.3M ($1.45/share) vs. $34.2M ($0.26) in 1999
Record revenues of $5.88B, up 31%, driven by competitive energy subsidiaries led by Select Energy ($1.79B in revenue, up more than 300%)
Con Edison merger terminated in dispute: Con Edison refused to close on March 5, 2001; NU sued for damages exceeding $1B, with outcome unpredictable per management
2001 earnings guidance of $1.40 to $1.60 per share, excluding significant nonrecurring gains and losses
Expected Millstone sale to Dominion (~$1.3B total; ~$843M to CL&P, ~$196M to WMECO, $26M to PSNH) plus securitizations expected to return over $5B of cash to regulated subsidiaries from 1999 to 2002
Credit upgrades in January 2001 returned NU's unsecured debt to investment-grade for the first time in five years; total NU system debt was $3.8B at year-end 2000
Ongoing risks: Select Energy's fixed-price standard offer contract (about 26% of 2000 competitive revenue) through 2003, a $14.8M (-$0.10/share) Q4 2000 hit from FERC's revised ICAP capacity pricing, and pending Millstone and Seabrook litigation and divestitures

03—Questions

Frequently Asked Questions

Why did NU report a net loss in 2000 when earnings before extraordinary items were positive?
The net loss of $28.6M reflects $233.9M in after-tax extraordinary charges. The largest was roughly $225M written off by PSNH under the New Hampshire Settlement Agreement, plus charges from discontinuing SFAS No. 71 for generation businesses at CL&P, WMECO and PSNH and a $19.7M charge at Holyoke Water Power. Income before these items was $205.3M, or $1.45 per diluted share.
What happened with the Consolidated Edison merger and what could it mean for shareholders?
Under the original terms, NU shareholders would have received a $25 base price in cash and Con Edison stock, plus $1 per share from the Millstone auction and about $0.10 per share per month after August 5, 2000. Assuming Con Edison stock averaged $36 to $46, shareholders would have received about $26.84 per share if the deal closed April 10, 2001. Con Edison refused to close on March 5, 2001, and both sides filed lawsuits in federal court in New York. NU has said it cannot predict the outcome. Investors should treat the litigation result as a major uncertainty.
How is NU positioned financially for 2001?
Management expects the Millstone sale to Dominion and securitization of stranded costs (CL&P about $1.45B, WMECO $155M, PSNH up to $670M) to reduce debt substantially and return equity to the parent. Common equity ratio at year-end was 35.1% against a 30% covenant, and the consolidated interest coverage ratio was 2.4x against a 2.0x covenant. Management guided 2001 EPS to $1.40 to $1.60 before significant nonrecurring items, but CL&P's earnings are expected to decline after the Millstone sale.
What are the main operating risks for Select Energy?
Select Energy supplies roughly half of CL&P's standard offer load at fixed prices through December 31, 2003, which accounted for about 26% of 2000 competitive energy revenue. Management says it partly hedges this through NGC purchases, 850 MW of Millstone and Seabrook output through 2001, and other supply contracts, but earnings would fall if supply costs rise above contract prices. The competitive energy segment contributed only $13.6M to 2000 earnings, so this exposure matters for NU's results.
What regulatory developments could affect earnings in 2001?
Several items are pending: a FERC order reinstating the $8.75/kW-month installed capacity charge effective April 1, 2001, after a revised decision cut NU's Q4 2000 revenue by $24.6M; the DPUC's decision on a possible interim rate decrease for CL&P (expected April 2001) after ROEs above authorized levels; a Yankee Gas rate case filing in July 2001; and New Hampshire's Supreme Court review window closing May 1, 2001. PSNH and NAEC are also expected to see significant earnings declines after restructuring takes effect.

04—Continue

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