01—Abstract
Summary
Summary of the 10-K filed March 17, 2005. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU), the parent of Connecticut Light & Power (CL&P), Public Service Co. of New Hampshire (PSNH) and Western Massachusetts Electric (WMECO), reported 2004 net income of $116.6 milliona, or $0.91 per diluted share, essentially flat versus $116.4 million in 2003.
Results were held back by a $48.3 millionb after-tax mark-to-market loss on natural gas hedges tied to wholesale electricity positions, plus $8.8 million of after-tax investment write-downs. The Utility Group, which holds the regulated distribution, transmission and gas businesses, earned $155.6 million ($1.21 per share), up $23.1 million on higher retail rates. NU Enterprises, the competitive unit, lost $15.1 million.
The most important development for investors is the March 9, 2005 decision to exit the wholesale marketing business at Select Energy and to explore divesting the energy services businesses. A charge is expected in Q1 2005, but its size is not yet known. The company also disclosed that its internal controls over financial reporting were ineffective at year-end 2004 because of a material weakness in accounting for those natural gas contracts.
Deloitte issued an adverse opinion on internal controls, and NU restated its June and September 2004 quarterly results. The Utility Group faces a heavy capital program: about $3.7 billionc over 2005-2009, with NU expecting to fund roughly half from operating cash flow and to need several hundred million dollars of common equity, possibly from a share sale as early as 2006. Rating outlooks were lowered in 2004 and Moody's downgraded several NU entities in February 2005.
Key open items include the FERC transmission ROE hearings, the CYAPC decommissioning cost dispute, the Con Edison merger litigation and the CL&P transmission projects. Guidance calls for Utility Group EPS of $1.22 to $1.30d in 2005, with no consolidated NU Enterprises guidance.
02—Key points
Key Highlights
- 2004 net income of $116.6 million ($0.91 per diluted share), essentially flat versus 2003; includes a $48.3 million after-tax mark-to-market loss on natural gas hedges and $8.8 million of after-tax investment write-downs.
- Utility Group earnings rose $23.1 million to $155.6 million ($1.21 per share), driven by higher CL&P retail rates effective January 2004; 2005 Utility Group EPS guidance is $1.22 to $1.30.
- March 9, 2005 decision to exit NU Enterprises' wholesale marketing business (Select Energy) and explore divesting energy services businesses; a first-quarter 2005 charge is expected but not yet quantified.
- Management concluded internal control over financial reporting was ineffective at December 31, 2004 due to a material weakness in derivative accounting; Deloitte issued an adverse opinion, and June and September 2004 results were restated (net income impacts of +$1.1 million and -$47 million).
- Capital expenditures of $643.8 million in 2004, with about $3.7 billion projected for 2005-2009; NU expects to need several hundred million dollars of equity, possibly via a common share sale as early as 2006.
- Credit outlooks were lowered: S&P moved NU to negative, and Moody's cut NU, CL&P, Yankee Gas and NGC by one notch in February 2005 (WMECO by two). NGC's debt is now below investment grade at S&P.
- Significant contingent exposures include CYAPC decommissioning cost recovery at FERC (DPUC seeks a $225-234 million disallowance, of which NU's share is $110-115 million), the Bechtel litigation, Con Edison merger damages and a $900 million-plus transmission build-out subject to regulatory approval.
03—Questions
Frequently Asked Questions
Why did NU's competitive energy business post a loss in 2004, and what is changing?
NU Enterprises lost $15.1 million in 2004, driven mainly by a $48.3 million after-tax mark-to-market loss on natural gas contracts hedging electricity purchases for wholesale load. Competition in New England wholesale markets also intensified in late 2004, lowering Select Energy's win rate and margins. In March 2005 NU decided to exit wholesale marketing and explore selling energy services businesses, while retaining the 1,443 MW generation fleet and retail marketing. The financial impact, including asset impairments, closure costs and mark-to-market effects, is not yet quantified.
What drove the increase in Utility Group earnings?
Utility Group earnings rose to $155.6 million from $132.5 million. The main driver was CL&P's retail rate increase effective January 1, 2004, which followed the DPUC's December 2003 rate decision and its August 2004 reconsideration (about $6.9 million after-tax benefit in 2004). These gains were partly offset by lower pension income, higher interest and depreciation, and a higher effective tax rate at CL&P.
What is the material weakness, and does it affect the financial statements?
Management determined that certain wholesale natural gas contracts were incorrectly accounted for under the accrual method rather than at fair value. This led to restatements of the June and September 2004 quarterly reports. Management says the error has been corrected and that controls are being strengthened, but internal control was ineffective at year-end 2004. Deloitte's audit opinion on the financial statements remained unqualified; its adverse opinion relates to internal control.
How will NU fund its large capital program?
NU expects to fund about half of its $4 billion-plus 2005-2009 cash needs from operating cash flow. The remainder is expected through external debt, mainly at the Utility Group, plus several hundred million dollars of common equity, with public share sales possible as early as 2006. Financing depends on regulatory approval of major transmission projects, and credit rating downgrades in 2004-2005 could modestly raise borrowing costs on revolving facilities.
04—Continue