01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU) reported 2007 net income of $246.5 milliona, or $1.59 per fully diluted share, down from $470.6 million ($3.05 per share) in 2006.
The decline is largely attributable to non-recurring 2006 items: an after-tax $314 millionb gain on the sale of the competitive generation business and a $74 million income tax reduction at CL&P from an IRS Private Letter Ruling. Excluding these, earnings reflect a stronger regulated business, with the regulated companies earning $228.7 million ($1.47 per share), up from roughly $1.28 per share in 2006 distribution and generation plus transmission combined at a higher level, and NU Enterprises contributing only $11.7 million as its remaining wholesale contracts are wound down. The company is now essentially a pure-play regulated utility holding company operating CL&P, PSNH, WMECO and Yankee Gas, with transmission earnings growing rapidly (about $82.5 million in 2007 versus $59.8 million in 2006) on roughly $1 billion of investment since 2005 in southwest Connecticut projects.
Management guides to 2008 EPS of $1.65 to $1.90c and projects 8 to 11 percent compounded annual EPS growth through 2012 on a base of $1.59, supported by about $6 billion of regulated capital expenditures over 2008-2012 and a transmission rate base expected to grow from about $1.5 billion to roughly $3.9 billion. Key risks include a below-expectation CL&P distribution rate decision (9.4% authorized ROE versus an 11% request), ongoing Con Edison merger litigation with a trial set for March 2008, regulatory uncertainty around decoupling and Connecticut energy policy, rising capital costs, and potential collateral calls tied to a ratings downgrade. Liquidity is adequate with $15.1 million of cash at year-end after roughly $400 million of deferred 2006-sale-related taxes were paid in 2007.
02—Key points
Key Highlights
- 2007 EPS of $1.59 versus $3.05 in 2006, with the decline driven by non-recurring 2006 gains ($314 million after-tax from the generation sale and a $74 million CL&P tax benefit from an IRS PLR).
- Regulated companies earned $228.7 million ($1.47/share), with transmission earnings of $82.5 million (up from $59.8 million) and distribution and generation earnings of $146.2 million.
- 2008 EPS guidance of $1.65 to $1.90, and projected 8% to 11% compound annual EPS growth from 2008 through 2012.
- Approximately $6 billion of regulated capital expenditures planned for 2008-2012, with transmission rate base projected to grow from about $1.5 billion to about $3.9 billion by 2012.
- The DPUC approved a $77.8 million (11.7%) distribution rate increase for CL&P effective February 2008 but at a 9.4% regulatory ROE, well below the 11% requested.
- Con Edison merger litigation advanced to a trial-ready status on four days' notice beginning March 21, 2008, with the outcome unpredictable.
- NU parent ratings are Baa2/BBB-/BBB with stable outlooks; the company expects to issue about $700 million of long-term debt in 2008 and approximately $500 million of equity from 2009 to 2012.
03—Questions
Frequently Asked Questions
Why did NU's earnings fall so sharply in 2007?
Most of the drop reflects non-recurring 2006 items rather than operating deterioration. 2006 included a $314 million after-tax gain on the sale of the competitive generation business and a $74 million CL&P income tax reduction from an IRS private letter ruling. CL&P's distribution segment also lost a fixed procurement fee of about $6.6 million after tax. Regulated transmission and distribution earnings in aggregate remained solid.
What is the outlook for transmission earnings?
Transmission is the main growth engine. Management expects transmission to represent roughly 50% of total earnings by 2012. Transmission earnings track rate base under FERC-approved formula tariffs, which earn a base ROE of 10.9% plus incentive adders that bring the potential ROE on new regional projects to 12.4%. Approximately $3 billion of transmission capital is planned for 2008-2012, including the NEEWS and Springfield Underground Cables projects, whose cost estimates are still being refined.
How significant was the CL&P rate decision?
The January 2008 DPUC decision was positive in dollar terms, approving $77.8 million of annualized increases effective February 2008 and $20.1 million in 2009, and substantially all of the requested $294 million 2008 capital budget. However, the 9.4% authorized ROE was well below the 11% requested. Management also expects CL&P's 2008 regulatory ROE to come in below the authorized level because of disallowed operating expenses, and the decision introduced decoupling via rate design rather than the proposed revenue-per-customer mechanism.
What are the main financial and litigation risks?
Key risks include the Con Edison merger lawsuit, where Con Edison claims at least $314 million in damages and NU seeks about $32 million in costs; the outcome is not predictable. Environmental exposure includes a river tar site in Massachusetts with uncertain remediation costs and MGP sites with potential ranges up to $232 million for the MGP litigation against UGI. Credit ratings triggers could require roughly $94 million of collateral from Select Energy if ratings fell below investment grade. Capital needs of about $6 billion over five years will require continued debt and equity issuance.
How is the company funding its large capital program?
Funding relies on a mix of operating cash flow, subsidiary-level long-term debt, NU parent equity infusions, and revolving credit. Operating cash flow was $248 million in 2007 but was depressed by about $400 million of taxes paid on the 2006 generation sale; management projects approximately $500 million in 2008 rising to $800-850 million by 2012. The regulated companies maintain a $400 million facility and NU parent a $500 million facility, both expiring in November 2010, and NU's consolidated debt-to-capitalization ratio was 54.6% at year-end 2007.
04—Continue