10-QPeriod: Q2 FY2003

EVERSOURCE ENERGY Quarterly Report for Q2 Ended Jun 30, 2003

Filed August 8, 2003For Securities:ES

Summary

Eversource Energy (formerly Northeast Utilities) reported mixed results for the six months ended June 30, 2003. While consolidated net income increased significantly compared to the prior year, largely due to the absence of prior-year write-downs and investment tax credits, the underlying performance of the Utility Group saw a decline. This was offset by a strong turnaround in NU Enterprises, driven by improved wholesale marketing and reduced energy trading losses. Key financial developments include a substantial increase in operating revenues driven by both the Utility Group and NU Enterprises. However, operating expenses also rose considerably, largely due to increased fuel and purchased power costs. The company reaffirmed its full-year earnings per share guidance of $1.10 to $1.30, though it anticipates lower results in the second half of the year due to seasonal factors and the absence of certain one-time benefits. Liquidity remains strong, supported by cash reserves and credit facilities, and the company announced a dividend increase. Investors should monitor the resolution of significant regulatory matters, particularly those related to Standard Market Design (SMD) implementation and the NRG Energy exposures, which could impact future financial performance.

Key Highlights

  • 1Consolidated net income for the first six months of 2003 was $87.1 million, a significant increase from $47.5 million in the same period of 2002. This improvement was primarily due to the absence of significant write-downs and investment tax credits recorded in the prior year.
  • 2Operating revenues increased to $3.1 billion for the first six months of 2003, up from $2.4 billion in the prior year, driven by higher electric and natural gas sales in the Utility Group and increased wholesale marketing revenues at NU Enterprises.
  • 3The Utility Group's net income decreased by $21.2 million for the first six months of 2003 compared to 2002, primarily due to the absence of prior-year benefits like investment tax credits and the sale of the Seabrook nuclear unit.
  • 4NU Enterprises demonstrated a strong recovery, with net income improving to $17.1 million for the first six months of 2003 from a loss of $29.7 million in the prior year, attributed to better performance in wholesale marketing and reduced energy trading losses.
  • 5The company reaffirmed its 2003 earnings per share guidance of $1.10 to $1.30, though it cautioned that the second half of the year is expected to show lower quarterly results compared to the second half of 2002.
  • 6Consolidated cash flows from operating activities decreased to $220.8 million for the first six months of 2003 from $347.2 million in 2002, largely due to higher tax payments.
  • 7Eversource Energy's (NU) credit ratings were placed on a negative outlook by Moody's and Fitch, stemming from higher forecasted capital spending at CL&P and efforts by NRG Energy to terminate a contract.

Frequently Asked Questions

The significant increase in net income was primarily driven by the absence of certain non-recurring items recorded in the first six months of 2002. These included after-tax write-downs totaling $10 million related to investments in NEON Communications and Acumentrics, and approximately $13 million of investment tax credits related to divested generation at WMECO. The 2003 period did not have similar large write-downs or credits.

The implementation of SMD in New England on March 1, 2003, led to increased costs for CL&P related to transmission congestion and line losses. For the period from March 1 to June 30, 2003, CL&P incurred approximately $62 million in incremental LMP costs, with about 80% attributed to line losses. CL&P began recovering these costs from customers starting May 1, 2003, but the ultimate responsibility for these costs between CL&P's customers and its standard offer service suppliers is subject to a pending FERC decision.

Eversource Energy projects full-year net income between $1.10 and $1.30 per share. However, management anticipates that lower quarterly results in the third and fourth quarters of 2003 compared to the second half of 2002 are likely, due to factors such as more seasonal weather, a decline in pension income, and the absence of certain regulatory asset-based earnings from the prior year.

NU Enterprises faces several risks. A significant one is the potential financial impact if the responsibility for incremental LMP costs, which began March 1, 2003, is ultimately deemed to be the responsibility of the standard offer service suppliers rather than CL&P's customers. This could reduce NU Enterprises' pre-tax earnings by an estimated $35 million for the first six months of 2003. Additionally, market conditions have led to a shorter-term and less liquid market for energy trading and marketing products, with participants finding it harder to meet credit standards. This could adversely affect Select Energy's business. The company also faces counterparty credit risk and potential impacts from changes in market design and administration of transmission systems.