Eversource 2004 Annual Report Download - page 23

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A summary of NU Enterprises’ earnings/(losses) by business for 2004,
2003 and 2002 is as follows:
For the Years Ended December 31,
(Millions of Dollars) 2004 2003 2002
Merchant Energy $(12.1) $(5.5) $(52.4)
Energy Services, Parent and Other (3.0) 2.1 (0.8)
Net Loss $(15.1) $(3.4) $(53.2)
The mark-to-market loss on natural gas contracts was the primary
reason for increased NU Enterprises losses in 2004. This loss was in
the wholesale marketing portion of the merchant energy segment.
However, merchant energy earnings benefited from improved results
in the retail marketing portion of the merchant energy segment from
increased commercial and industrial electric and natural gas sales.
Retail marketing earned $4.9 million in 2004, compared to a loss of
$1.8 million in 2003. Energy services earnings decreased by $4.9 million
in 2004 from 2003 due primarily to losses on a construction contract.
Parent and Other: Losses unrelated to the Utility Group and NU
Enterprises totaled $23.9 million in 2004, compared with a loss of
$12.7 million in 2003 and income of $7 million in 2002. The higher
losses in 2004 were mostly attributable to investment write-downs
related to NU’s investments in a fuel cell development company and
a telecommunications company and due to higher interest expenses.
The higher losses in 2003 were mostly attributable to the negative
$4.7 million cumulative effect of an accounting change associated
with the adoption of FIN 46 recorded in 2003 and to Seabrook related
gains recorded in 2002.
Future Outlook
Utility Group: The Utility Group estimates that it will earn between
$1.22 per share and $1.30 per share in 2005. That range reflects
earnings of between $0.96 per share and $1.00 per share in the
regulated distribution and generation business and between
$0.26 per share and $0.30 per share in the transmission business.
NU Enterprises: The earnings of NU Enterprises will be impacted by
many factors, including the amount of asset impairments or losses
on disposals that could result from the decision to exit the wholesale
marketing business and explore ways to divest the energy services
segment, the mark-to-market loss that may result from the application
of mark-to-market accounting to certain wholesale marketing contracts
until those contracts are sold or until the commodities are delivered,
and other closure costs. Accordingly, NU will not be providing NU
Enterprises or NU consolidated 2005 earnings guidance.
Parent and Other: Parent and other costs, primarily related to interest
expense, are estimated to total between $0.08 per share and
$0.13 per share in 2005.
Strategic Overview
The company has identified significant investment requirements in the
Utility Group transmission and distribution businesses and expects to
invest more than $3.7 billion in regulated electric and natural gas
infrastructure from 2005 through 2009.
Based on current projections, NU expects that the need to invest heavily
in regulated infrastructure to meet reliability requirements and customer
growth will cause NU’s Utility Group distribution and generation rate
base to rise from $2.5 billion in 2004 to nearly $3.9 billion by the end
of 2009. Based on currently projected expenditures and capital project
completion dates, NU expects that the same factors will increase NU’s
Utility Group transmission rate base from approximately $460 million
in 2004 to approximately $1.7 billion by the end of 2009.
NU Enterprises Business Review: On March 9, 2005, NU completed its previously
announced comprehensive review of each of NU Enterprises’ businesses,
in which a full range of alternative strategies was considered. That
review considered:
• The impact of the increase in competition in the New England
wholesale energy markets over the last six months of 2004, which
has affected Select Energy’s profitability by reducing the number of
bids won and by reducing the margins on the bids that are won;
• The potential growth of the retail business, which had a significant
improvement in earnings in 2004 and which serves a market that
NU believes to be growing;
• The competitiveness and opportunities for increased value for the
1,443 MW of generation currently owned by NU Enterprises;
• The strategic fit of the energy services businesses; and
• The impact of any significant changes on NU as a whole.
As a result of the comprehensive review, NU has decided that NU
Enterprises will exit the wholesale marketing business. NU also concluded
that NU Enterprises’ energy services businesses are not central to
NU’s long-term strategy and do not meet the company’s expectations
of profitability. As a result, the company will explore ways to divest
those businesses in a manner that maximizes their value. Those
businesses include electrical, mechanical, telecommunications,
commercial plumbing, and performance contracting companies. NU will
retain its competitive generation and retail energy marketing businesses,
because it believes that the generation assets and retail business are
competitively positioned to create significant opportunities for those
businesses over the next several years.
NU has concluded that the wholesale merchant energy sector in the
power pools between Maine and Maryland is becoming increasingly
competitive and that NU Enterprises’ wholesale marketing business
will be unable to attain the profit margins necessary to generate
acceptable returns and cash flows. As a result, NU Enterprises will
explore a number of alternatives for exiting the wholesale marketing
business, including selling the wholesale franchise, selling existing
contracts, restructuring longer term contracts, and allowing shorter-
term contracts to expire without being renewed. In the interim, NU
Enterprises will only bid on new full requirements wholesale contracts
to improve the value of its book of business by reducing existing
electric positions.