01—Abstract
Summary
Summary of the 10-K filed March 22, 2002. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU), parent of CL&P, PSNH, WMECO and Northeast Generation Company, reported 2001 net income of $243.5 milliona, or $1.79 per fully diluted share, versus a $28.6 million loss ($0.20 per share) in 2000.
The headline improvement is driven largely by non-recurring items: a $115.6 millionb after-tax gain on the sale of the Millstone nuclear units to Dominion Nuclear Connecticut (about $1.2 billion in proceeds), partly offset by a $22.4 million after-tax SFAS 133 adoption charge and a $35.4 million mark-to-market loss on share repurchase contracts. Excluding these items, NU earned about $185.7 million, or $1.37 per share, compared with $1.45 per share in 2000 excluding the extraordinary charge. Management guided 2002 EPS to $1.40 to $1.65, excluding significant nonrecurring items, and expects regulated earnings to be relatively stable absent major adverse events, while noting pension income will fall from about $101 million to about $73 million.
The balance sheet and financing picture improved sharply. Securitization through rate reduction bonds and certificates (about $2.1 billionc issued across CL&P, PSNH and WMECO) allowed NU to retire roughly $1.3 billion of debt and preferred stock, cutting system debt to about $2.7 billion from $3.8 billion. The NU capitalization ratio moved to 54.3% debt and 43.3% common equity, and senior debt ratings were upgraded to the highest levels in decades.
NU also repurchased about 14.3 million shares in 2001 and authorized up to 15 million more through July 2003, which lifted EPS but consumed substantial cash. Key risks remain. Select Energy, the competitive marketing arm with about $3 billiond of 2001 revenue, is obligated to supply 50% of CL&P's standard offer load at below-market prices through 2003, and management says this may hurt earnings unless Connecticut regulators raise the rate.
NU also faces a pending lawsuit against Consolidated Edison over the terminated merger (both sides seek over $1 billion), NEON Communications debt-restructuring exposure on a $15 million note plus equity, and Millstone and ICAP-related litigation. In a notable governance item, Arthur Andersen was replaced by Deloitte & Touche as auditor on March 15, 2002.
02—Key points
Key Highlights
- 2001 net income of $243.5M ($1.79 diluted EPS) vs. a $28.6M loss in 2000, but roughly $57.8M of the improvement reflects non-recurring items; excluding them, EPS was about $1.37.
- Millstone sale to Dominion (closed March 31, 2001) generated about $1.2B in cash proceeds and a $115.6M after-tax gain, used mainly to repay debt and fund share buybacks.
- About $2.1B of rate reduction bonds and certificates were issued by CL&P, PSNH and WMECO, nonrecourse to the parent, enabling retirement of roughly $1.3B of debt and preferred stock.
- 2002 EPS guidance of $1.40 to $1.65 excluding significant nonrecurring items; pension income is expected to fall to about $73M from about $101M.
- Select Energy's obligation to supply 50% of CL&P's standard offer load at below-market prices through 2003 pressures competitive-segment earnings, which contributed only $5M in 2001.
- Capitalization improved to 54.3% debt / 43.3% common equity, and senior debt ratings were upgraded to multi-decade highs (NU parent Baa1/BBB).
- Ongoing exposures include the Con Edison merger litigation (claims over $1B each way), NEON Communications credit risk on a $15M note and equity stake, and the Seabrook and Vermont Yankee sales expected in 2002.
03—Questions
Frequently Asked Questions
Why did NU's reported earnings rise so sharply in 2001 if the underlying business was weaker?
Reported 2001 net income of $243.5M includes a $115.6M after-tax gain from selling the Millstone units, which more than offset weaker regulated results at CL&P and WMECO after Millstone's earnings left the system. Excluding nonrecurring items, NU earned about $185.7M, or $1.37 per diluted share, down from $205.3M in 2000. Investors should treat the one-time gain as non-repeating.
What is the outlook for 2002 earnings and what could move it?
Management guided EPS of $1.40 to $1.65 excluding significant nonrecurring items. Regulated businesses are expected to be stable absent a major adverse event such as a catastrophic storm. The main swing factors are the performance of the competitive energy subsidiaries, particularly Select Energy's margins under the CL&P supply contract, and pension income, which is expected to decline by roughly $28M pretax.
How are the rate reduction bonds and certificates affecting the company's risk profile?
The RRBs and RRCs (about $2.1B in total) are nonrecourse to NU's operating companies and are repaid from dedicated customer charges, so they reduce parent-level debt and improve leverage ratios. However, they are still recorded as liabilities on the balance sheet, which is why NU's consolidated common equity ratio had to be watched against SEC 30% minimum requirements, and why the company says it is above that level.
What are the largest legal or contingent exposures disclosed?
The most significant is NU's lawsuit against Consolidated Edison over the terminated 1999 merger, where NU seeks more than $1B in damages and Con Edison seeks damages equal to 82% of about $1.57B in expected synergies. A trial date had not been set as of the filing. Other exposures include the NEON Communications investment (NEON has missed interest payments and is restructuring debt), ICAP deficiency charge appeals, a Holyoke contract dispute with Bridgeport Energy, and Millstone-related fishing and environmental lawsuits.
Why did NU change auditors, and does it matter for investors?
On March 15, 2002, the Board replaced Arthur Andersen with Deloitte & Touche for the 2002 audit, after deciding to seek new proposals. Andersen's reports for 2001, 2000 and 1999 contained no adverse opinions or qualifications, and the filing states there were no disagreements with Andersen. The change is a governance event that investors should monitor, given the broader auditor-related scrutiny in 2002, but the filing itself discloses no accounting disputes.
04—Continue