Eversource 2003 Annual Report Download - page 22

20
Financial Condition and Business Analysis
Overview
Consolidated: Northeast Utilities and subsidiaries (NU or the company)
reported 2003 earnings of $116.4 million, or $0.91 per share, compared
with earnings of $152.1 million, or $1.18 per share, in 2002 and $243.5
million, or $1.79 per share, in 2001. All earnings per share (EPS)
amounts are reported on a fully diluted basis.
The 2003 earnings of $116.4 million, or $0.91 per share include a
charge of $36.9 million, or $0.29 per share, associated with a loss recorded
for the settlement of a wholesale power contract dispute between The
Connecticut Light and Power Company (CL&P) and its three 2003 standard
offer power suppliers, including an NU subsidiary, Select Energy, Inc. For
more information about this contract dispute and the settlement, see the
“Impacts of Standard Market Design” section of this Management’s
Discussion and Analysis. Also included in 2003 earnings was a negative
$4.7 million after-tax cumulative effect of an accounting change as a
result of the adoption of Financial Accounting Standards Board (FASB)
Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities.”
Excluding the effects of these two items, net income would have been
$158 million, or $1.24 per share.
NU’s 2003 results benefited from improved performance at NU Enterprises
and lower corporate-wide interest costs. The better performance at NU
Enterprises reflected improved margins on Select Energy, Inc.’s (Select
Energy) energy supply contracts, higher volumes, improved operation of
NU Enterprises’ generating facilities, and the absence of natural gas
trading losses that occurred in the first half of 2002. Those factors were
offset by lower pension income and the absence of earnings related to
the Seabrook nuclear unit (Seabrook).
During 2003, pre-tax pension income for NU declined $41.6 million,
from a credit of $73.4 million in 2002 to a credit of $31.8 million in
2003. Of the $31.8 million and $73.4 million of pension credits recorded
during 2003 and 2002, $16.4 million and $47.2 million, respectively,
were recognized in the consolidated statements of income as reductions
to operating expenses. The remaining $15.4 million in 2003 and $26.2
million in 2002 relate to employees working on capital projects and were
reflected as reductions to capital expenditures. The pre-tax $30.8 million
decrease in pension income that reduces operating expenses was reflected
evenly throughout 2003, resulting in a decline of $4.6 million in net
income per quarter during 2003.
NU’s EPS also benefited modestly from a share repurchase program. In
the first quarter of 2003, NU repurchased approximately 1.5 million of its
shares at an average price of $13.73. There were no share repurchases
during the remainder of 2003. On May 13, 2003, the company’s Board
of Trustees authorized the repurchase of up to 10 million shares through
July 1, 2005. NU had 127.7 million shares outstanding at December 31, 2003.
NU’s revenues for 2003 increased to $6.1 billion from $5.2 billion in
2002, or an increase of $0.9 billion. Of the $0.9 billion increase in NU’s
revenues, $0.8 billion related to NU Enterprises. NU Enterprises’ revenues
in 2003 increased primarily due to higher wholesale and retail sales
volumes of $0.4 billion and higher prices of $0.3 billion. The increase in
revenues is also due to increases in electric sales at the Utility Group in
2003 as compared to 2002.
Earnings decreased $91.4 million for the year ended December 31, 2002
as compared to 2001. This decrease is primarily the result of several
items recorded in 2001, including an after-tax gain of $115.6 million, or
$0.85 per share associated with the sale of the Millstone nuclear units
(Millstone), offset by an after-tax loss of $22.4 million, or $0.17 per
share related to the adoption of Statement of Financial Accounting
Standards (SFAS) No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” as amended, and a charge of $35.4 million, or
$0.26 per share related to an agreement with two financial institutions
to repurchase NU common shares. This earnings decrease is also
attributable to after-tax losses totaling $11 million, or $0.09 per share
recorded in 2002, associated with the write-down of investments in
NEON Communications, Inc. (NEON) and Acumentrics Corporation
(Acumentrics), offset by after-tax gains totaling $24.5 million, or $0.19
per share, associated with the sale of Seabrook, which were also recorded
in 2002.
Utility Group: Earnings at all of NU’s Utility Group subsidiaries were
lower in 2003 as compared with 2002. The Utility Group is comprised of
CL&P, Public Service Company of New Hampshire (PSNH), Western
Massachusetts Electric Company (WMECO), North Atlantic Energy
Corporation (NAEC), and Yankee Gas Services Company (Yankee Gas).
Utility Group net income was lower due to the absence of approximately
$13 million of investment tax credits (ITC) that were reflected in the second
quarter of 2002 at WMECO, as well as lower pension income and the
loss of earnings related to Seabrook. Lower pension income and the lack
of Seabrook earnings resulted in a net income decrease in 2003 as
compared to 2002 of $18.4 million and $16.3 million, respectively. These
decreases were partially offset by lower Utility Group controllable
operation and maintenance costs.
As a result of an adjustment to estimated unbilled electric revenues
resulting from a process to validate and update the assumptions used to
estimate unbilled revenues, 2003 Utility Group retail electric sales
increased 3.6 percent compared to 2002. Absent that adjustment, Utility
Group retail electric sales increased 2.1 percent. Adjustments to estimated
unbilled revenues had a negative impact on Yankee Gas. Yankee Gas
firm gas sales decreased 0.6 percent in 2003 as compared to 2002.
Absent those adjustments, Yankee Gas firm gas sales increased 7.8 percent.
Combined, the adjustments to estimated unbilled revenues increased
NU’s net income by approximately $4.6 million for 2003. For further
information regarding the estimate of unbilled revenues, see “Critical
Accounting Policies and Estimates — Utility Group Unbilled Revenues,”
included in this Management’s Discussion and Analysis.
CL&P earnings before preferred dividends totaled $68.9 million in 2003,
compared with $85.6 million in 2002. The lower income was primarily
attributable to lower pension income, after-tax write-offs of approximately
$5 million related to a distribution rate case that was decided in
December 2003, and a loss of approximately $1 million recorded for the
settlement of the wholesale power contract dispute.
Management’s Discussion and Analysis