Why did NU's 2003 earnings decline compared with 2002?

Earnings fell to $0.91 per diluted share from $1.18 mainly because of a $36.9 million after-tax settlement loss on the SMD dispute between CL&P and its suppliers, a $4.7 million after-tax FIN 46 charge, and about $41.6 million less pre-tax pension income. Lower Seabrook-related earnings and a 2002 WMECO investment tax credit benefit also contributed. These were partly offset by better results at NU Enterprises, where Select Energy's margins improved and trading losses were absent.

What does the SMD settlement mean for cash flow and earnings in 2004?

CL&P will pay about $83 million to its standard offer suppliers under the settlement and will return the remainder of the roughly $155 million it collected from customers through January 2004. The settlement is expected to be approved by FERC in the first half of 2004. Because the 2003 loss was already recorded, the settlement mainly affects cash flow rather than future earnings, and management expects operating cash flow to decline significantly in 2004.

How will NU fund its large capital program?

NU projects 2004 capital spending of about $738 million, and it expects CL&P to issue up to $250 million of first mortgage bonds, PSNH to issue up to $50 million of debt, and WMECO up to $52 million. Yankee Gas issued $75 million of 10-year first mortgage bonds in January 2004 at 4.8%. Management said the transmission projects would likely require additional external financing, and that CL&P plans to fund construction with about 45% equity and 55% debt.

What are the main risks investors should monitor?

Key risks include the pending PSNH delivery rate case and the FERC transmission rate case, both expected to be decided in the second half of 2004; FERC approval of the SMD settlement; exposure to counterparties after the NRG bankruptcy, including about $16 million owed to CL&P for station service; and the possibility that FERC does not allow recovery of rising Yankee Company decommissioning costs, which have grown significantly since 2002. Select Energy could also be asked for roughly $231 million in collateral if NU's credit ratings fell to sub-investment grade.

What is the status of NU's dispute with Consolidated Edison?

The merger litigation is ongoing in the U.S. District Court for the Southern District of New York. The court denied Con Edison's motion for summary judgment and kept NU's breach-of-contract claim, which seeks damages above $1 billion, while eliminating Con Edison's fraud and negligent misrepresentation claims. Oral argument on the proper beneficiaries of the merger agreement was scheduled for March 26, 2004, and no trial date has been set. Management said it cannot predict the outcome or its effect on NU.

ES 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 12, 2004. Cited figures are marked; the original filing is the authoritative source.

Northeast Utilities (NU), the parent of CL&P, PSNH, WMECO and Yankee Gas, closed 2003 with earnings of $116.4 million^a, or $0.91 per diluted share, down from $152.1 million ($1.18) in 2002.

Results were dragged down by a roughly $36.9 million^b after-tax (about $0.29 per share) settlement loss tied to the March 2003 Standard Market Design (SMD) dispute between CL&P and its standard offer suppliers, and by a $4.7 million after-tax accounting charge from consolidating R.M. Services under FIN 46. Excluding these items, net income would have been about $158 million, or $1.24 per share.

Lower pension income, which fell roughly $41.6 million^c pre-tax, was a further drag on the regulated utilities. The outlook for 2004 is mixed. Management guides to $1.20 to $1.40 per share of consolidated earnings, with NU Enterprises (Select Energy and the generation and services businesses) projected at $0.22 to $0.30 per share.

Cash flow will weaken significantly in 2004, mainly because CL&P must pay roughly $83 million^d to suppliers under the SMD settlement and refund previously overcollected stranded costs of about $262 million over four years. Capital spending is set to rise to about $738 million, with CL&P's transmission build-out (345-kV lines to Norwalk and Middletown) a major driver. These needs point to new external financing, including up to $250 million of CL&P first mortgage bonds.

The balance sheet remains serviceable. NU's total system debt, excluding rate reduction bonds, rose to $2.7 billion, and the company had $83.7 million of cash at year end.

Common equity was 46% of capitalization excluding rate reduction bonds. Key risks include pending regulatory decisions (the PSNH delivery rate case, the FERC transmission rate case, and the SMD settlement approval), the financial health of counterparties after the NRG bankruptcy, the Con Edison merger litigation (NU claims damages above $1 billion), and rising Yankee Company decommissioning costs, including $167.7 million of NU's share tied to the Bechtel contract termination.

02—Key points

Key Highlights

Reported 2003 net income of $116.4 million ($0.91 per diluted share), down 23% from $152.1 million ($1.18) in 2002.
Recorded a $36.9 million after-tax (about $0.29/share) loss on settlement of the SMD wholesale power dispute; excluding this and a $4.7 million FIN 46 charge, earnings would have been about $1.24/share.
2004 guidance of $1.20 to $1.40 per share, with NU Enterprises expected to contribute $0.22 to $0.30 per share as Select Energy's margins improve.
Operating cash flow is expected to decline significantly in 2004 due to the SMD settlement payment (about $83 million) and refunds of overcollected stranded costs (about $262 million over four years).
Capital program rising to about $738 million in 2004 from $550 million in 2003, with CL&P's 345-kV transmission projects (roughly $1.35 billion of net plant growth through 2008) likely requiring new external financing.
Total system debt (excluding rate reduction bonds) increased to $2.7 billion from $2.4 billion, and NU's common equity ratio was 46% of capitalization excluding rate reduction bonds.
Ongoing litigation includes NU's over $1 billion damages claim against Consolidated Edison over the terminated merger, and CYAPC's dispute with Bechtel over the Connecticut Yankee decommissioning.

03—Questions

Frequently Asked Questions

Why did NU's 2003 earnings decline compared with 2002?
Earnings fell to $0.91 per diluted share from $1.18 mainly because of a $36.9 million after-tax settlement loss on the SMD dispute between CL&P and its suppliers, a $4.7 million after-tax FIN 46 charge, and about $41.6 million less pre-tax pension income. Lower Seabrook-related earnings and a 2002 WMECO investment tax credit benefit also contributed. These were partly offset by better results at NU Enterprises, where Select Energy's margins improved and trading losses were absent.
What does the SMD settlement mean for cash flow and earnings in 2004?
CL&P will pay about $83 million to its standard offer suppliers under the settlement and will return the remainder of the roughly $155 million it collected from customers through January 2004. The settlement is expected to be approved by FERC in the first half of 2004. Because the 2003 loss was already recorded, the settlement mainly affects cash flow rather than future earnings, and management expects operating cash flow to decline significantly in 2004.
How will NU fund its large capital program?
NU projects 2004 capital spending of about $738 million, and it expects CL&P to issue up to $250 million of first mortgage bonds, PSNH to issue up to $50 million of debt, and WMECO up to $52 million. Yankee Gas issued $75 million of 10-year first mortgage bonds in January 2004 at 4.8%. Management said the transmission projects would likely require additional external financing, and that CL&P plans to fund construction with about 45% equity and 55% debt.
What are the main risks investors should monitor?
Key risks include the pending PSNH delivery rate case and the FERC transmission rate case, both expected to be decided in the second half of 2004; FERC approval of the SMD settlement; exposure to counterparties after the NRG bankruptcy, including about $16 million owed to CL&P for station service; and the possibility that FERC does not allow recovery of rising Yankee Company decommissioning costs, which have grown significantly since 2002. Select Energy could also be asked for roughly $231 million in collateral if NU's credit ratings fell to sub-investment grade.
What is the status of NU's dispute with Consolidated Edison?
The merger litigation is ongoing in the U.S. District Court for the Southern District of New York. The court denied Con Edison's motion for summary judgment and kept NU's breach-of-contract claim, which seeks damages above $1 billion, while eliminating Con Edison's fraud and negligent misrepresentation claims. Oral argument on the proper beneficiaries of the merger agreement was scheduled for March 26, 2004, and no trial date has been set. Management said it cannot predict the outcome or its effect on NU.

04—Continue

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