01—Abstract
Summary
Summary of the 10-K filed March 21, 2003. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU), parent of CL&P, PSNH, WMECO and Yankee Gas, reported 2002 earnings of $152.1 milliona, or $1.18 per diluted share, down from $243.5 million ($1.79) in 2001.
The decline was driven by the absence of 2001's Millstone sale gain and by a loss of $54.1 millionb at its competitive energy subsidiaries, led by Select Energy. The regulated utilities earned $1.72 per share in aggregate in 2002, and most of the earnings decline is attributed to that segment's lower base, not just competitive losses. The company completed the four-year divestiture of its generation fleet with the November 2002 sale of its Seabrook interests for roughly $384 million in total cash proceeds.
For 2003, NU guides to earnings of $1.10 to $1.30c per share. The guidance reflects the loss of Seabrook-related earnings, a sharp drop in projected pension income (from $73.4 million pre-tax to about $31 million), and expected improvement at the competitive businesses. Management expects Select Energy's wholesale business to be profitable, its retail business to break even, and trading to be modestly profitable, though these forecasts depend on new business wins and favorable river conditions.
Investors should weigh several risks. Standard Market Design began on March 1, 2003, shifting congestion costs onto Connecticut customers, with CL&P potentially bearing about 80% of costs of $50 million to $300 milliond region-wide.
NRG Power Marketing, a supplier to CL&P's standard offer load, is in financial distress, and its parent NRG is in default. Con Edison merger litigation seeks damages in the hundreds of millions, and NU continues to repurchase shares while carrying about $2.4 billion of system debt excluding rate reduction bonds.
02—Key points
Key Highlights
- 2002 net income fell 38% to $152.1 million ($1.18/share) from $243.5 million ($1.79/share) in 2001, largely because 2001 included a $115.6 million after-tax Millstone gain.
- Competitive energy subsidiaries lost $54.1 million in 2002 versus roughly $5 million of earnings in 2001; Select Energy's retail marketing lost about $28 million and trading lost about $24 million.
- 2003 EPS guidance is $1.10 to $1.30, below 2002 results, reflecting lost Seabrook earnings and pension income falling from $73.4 million to about $31 million.
- Completed the Seabrook sale on November 1, 2002, receiving about $384 million in cash; the generation divestiture program is now finished, and CL&P and WMECO are pure wires companies.
- Standard Market Design took effect March 1, 2003, with CL&P expected to bear about 80% of Connecticut congestion costs; the 2003 region-wide estimate is $50 million to $300 million.
- Counterparty risk is elevated: NRG Power Marketing supplies 45% of CL&P's standard offer load, NRG's parent is in default, and Select Energy has about $183 million of NU parent guarantees outstanding.
- Total system debt was $2.4 billion at year-end 2002 (down from $2.7 billion), with no CL&P, PSNH or WMECO debt maturities through 2011 and continued share repurchases.
03—Questions
Frequently Asked Questions
Why did Northeast Utilities' earnings decline in 2002?
The main driver was the absence of the 2001 gain on the Millstone sale, which contributed about $115.6 million after tax. Earnings were also pressured by losses of $54.1 million at the competitive energy businesses, mainly from weak retail marketing and trading at Select Energy, and by a falling contribution from regulated pension income.
What is the outlook for 2003 earnings?
NU expects earnings of $1.10 to $1.30 per share in 2003. The guidance assumes regulated businesses earn $1.05 to $1.15 per share, reduced by the loss of NAEC's Seabrook earnings, the one-time 2002 WMECO tax credits, and lower pension income. Competitive subsidiaries are projected to earn $0.15 to $0.25 per share if Select Energy meets its profitability targets.
What are the biggest near-term risks to investors?
Key risks include higher congestion and reliability-must-run costs under SMD in Connecticut, the financial deterioration of NRG and possible CL&P standard offer supply disruption, the Con Edison merger damages suit, uncertainty in Select Energy's trading and wholesale businesses, and a planned 2004 CL&P rate increase that management says could be significant. Management also notes the risk that rating downgrades would require roughly $140 million to $220 million of collateral from Select Energy.
Is the dividend and share buyback program sustainable?
NU paid $67.8 million in common dividends in 2002 and raised the quarterly rate to $0.1375 per share, with management indicating further increases are expected, subject to earnings and board approval. The company repurchased 3.7 million shares in 2002 and 1.1 million in early 2003, with authorization for 6 million more through June 2003. Parent-level liquidity is supported by no debt maturities and minimal sinking fund payments ($23 million in 2003).
How strong is the balance sheet after the asset sales?
Debt has fallen significantly, with NU system debt of $2.4 billion excluding rate reduction bonds, compared with $2.7 billion a year earlier, and NU's ratings are described as higher than in at least three decades. Regulated utility leverage ratios are generally within covenant limits, though CL&P's common equity ratio is 24.1% and below the 30% SEC standard, which the SEC has allowed through 2004. Management expects CL&P to need external financing in 2004 through 2007 to fund its planned transmission build-out.
04—Continue