01—Abstract
Summary
Summary of the 10-K filed March 10, 2006. 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) plus Yankee Gas, reported a 2005 net loss of $253.5 milliona, or $1.93 per share, versus earnings of $116.6 million ($0.91) in 2004.
The loss was driven almost entirely by NU Enterprises, the competitive energy unit, which lost $398.2 millionb after $278.9 million of after-tax mark-to-market charges on wholesale contracts and $43.7 million of restructuring and impairment charges. Management decided in 2005 to exit all competitive businesses (wholesale and retail marketing, generation, and energy services) by the end of 2006, with proceeds earmarked for debt reduction and funding the regulated utilities. The regulated Utility Group remained profitable, earning $163.4 million ($1.24 per share) in 2005, up from $155.6 million.
Results were supported by higher transmission earnings and distribution rate increases, partly offset by employee termination and pension curtailment charges. Management guided 2006 combined Utility Group and parent earnings of $1.09 to $1.22c per share and projects roughly $4.3 billion of regulated capital investment from 2006 through 2010, with 8% to 10% annual EPS growth targeted beginning in 2007.
Liquidity was supported by a December 2005 common equity issuance of 23 million shares raising about $425 milliond net. Key risks for investors include the remaining wholesale contract exposures through 2013, collateral calls of roughly $407 million if NU were downgraded to sub-investment grade, sharply higher Connecticut retail rates (a 17.5% TSO increase in 2006 plus 4.9% more in April), pending FERC decisions on transmission ROE and CYAPC decommissioning costs, and the proposed Forward Capacity Market, which could cost CL&P about $470 million over the transition period.
02—Key points
Key Highlights
- 2005 net loss of $253.5 million ($1.93/share) versus 2004 net income of $116.6 million ($0.91/share), driven by NU Enterprises losses of $398.2 million.
- Utility Group (regulated) earned $163.4 million ($1.24/share) in 2005, up from $155.6 million in 2004.
- NU is exiting all competitive businesses by year-end 2006; wholesale marketing exit cost about $242 million, with about $186 million paid in 2005.
- 2006 combined Utility Group and parent EPS guidance is $1.09 to $1.22; 2007+ regulated EPS growth target of 8% to 10% annually.
- Planned regulated capital spending of up to $4.3 billion over 2006-2010, including about $2.3 billion for high-voltage transmission; 2006 capex approaches $900 million.
- Connecticut TSO rates rose 17.5% on January 1, 2006 (plus 4.9% April 1), an annualized increase of $676.5 million, raising customer affordability and sales risk.
- Sub-investment-grade downgrade could require about $407 million of Select Energy collateral; NU's senior unsecured ratings are Baa2/BBB-, stable outlook.
03—Questions
Frequently Asked Questions
Why did Northeast Utilities report a large loss in 2005?
The loss came from NU Enterprises, the competitive unit, which lost $398.2 million. The main driver was a $278.9 million after-tax mark-to-market charge on long-dated wholesale electricity contracts being exited, plus $43.7 million of after-tax restructuring and impairment charges. The regulated utilities were profitable.
Is NU's regulated business still profitable and growing?
Yes. The Utility Group earned $163.4 million in 2005, up from $155.6 million, aided by transmission investment growth and distribution rate increases. Management expects 8% to 10% regulated EPS growth from 2007, contingent on regulatory approvals and the planned $4.3 billion of 2006-2010 investment.
What are the main financial risks from the exit of competitive businesses?
Remaining wholesale obligations run through 2013 and remain marked-to-market, creating earnings volatility. Retail marketing may require a significant payment to the buyer, and a downgrade to sub-investment grade could require roughly $407 million of collateral. Exit completion by end of 2006 is not guaranteed.
Will customers face higher bills, and how does that affect the utilities?
Yes. Connecticut TSO rates rose sharply in 2006 because of higher supplier bids, and Massachusetts basic service rates rose about 44% on average. Management is concerned higher prices may reduce 2006 sales, which hurts distribution earnings, though fuel and supply costs are generally passed through to customers.
What regulatory decisions could materially affect NU in 2006?
Key pending items include the FERC's final order on transmission ROE (the company assumes 11.5%), the FERC ruling on CYAPC decommissioning cost recovery (NU's share of the increase is about $194 million), the ISO-NE Forward Capacity Market settlement (decision requested by June 30, 2006), and the New Hampshire Supreme Court appeal of PSNH's generation ROE cut to 9.62%.
04—Continue