Citing a change in accounting for some contracts, Berlin, CT-based Northeast Utilities (NU) announced that it will restate its second and third quarter 2004 financial statements and is lowering its previous 2004 earnings guidance.
The company said these actions result from a determination that mark-to-market accounting, rather than accrual accounting, is the correct accounting for certain natural gas contracts established to mitigate the risk of electricity purchased in anticipation of winning certain levels of wholesale electric load in New England.
In November 2004, NU reported that its competitive marketing subsidiary, Select Energy Inc., had not won its expected level of New England wholesale load for 2005. The company also said that adverse movements in commodity prices had negatively affected positions taken in anticipation of achieving targeted sales goals.
While the company is recording losses on those natural gas contracts in 2004, the electricity contracts Select Energy secured to serve the anticipated wholesale load currently have significant value and are expected to benefit 2005 results, NU said, adding that those electricity contracts will remain on accrual accounting.
Under the mark-to-market accounting, changes in the fair value of the natural gas contracts are recorded in earnings currently, rather than as the natural gas is delivered, as under accrual accounting. NU said it has concluded that its use of accrual accounting for those natural gas contracts in the second and third quarters of 2004 was incorrect and will mark them to market when it restates results from those quarters and reports year-end 2004 results.
Due to the accounting change, NU will record an after-tax loss of $48.3 million, or $0.38 per share, in 2004 attributable to those contracts. "Approximately $42 million of that loss is attributable to 2005 contracts and $6 million is associated with 2006 contracts," NU said. "Reported second quarter 2004 earnings will be increased from $22.9 million to $24 million and third quarter 2004 results will be reduced from previously reported earnings of $39.1 million to a loss of $7.9 million. A $2.4 million loss on these contracts will be reflected in fourth quarter earnings, resulting in losses on the contracts in 2004 of $48.3 million."
In addition to the changes in its competitive business results, NU said it now expects that its regulated businesses will be at or above their previously disclosed 2004 earnings range due to better than anticipated fourth quarter results. The company added that it also expects previously estimated "Parent and Other" 2004 losses to increase as a result of write-downs of certain non-core investments totaling approximately $9 million, or 7 cents per share, for the full year. As a result of these developments, NU revised its 2004 earnings per share guidance as follows:
In total, NU revised its 2004 guidance from $1.25-1.35 to $0.85-0.97. The company said that because losses associated with the mark-to-market accounting will be recognized in 2004, it now believes that its 2005 earnings could increase significantly, compared to its previous guidance, subject to market volatility and other risks.
However, NU CEO Charles W. Shivery said a review of the company is necessary to chart its future course. "Our competitive businesses have been unable to sustain the kind of financial performance we expect and, as a result, we are undertaking a comprehensive review of each of our competitive business lines in which the full range of alternative strategies will be considered," he said. "We expect to complete this review within the next several weeks and will provide new 2005 earnings guidance for those businesses and for NU as a whole at that time."
Shivery added that NU expects its regulated businesses to earn between $1.22 per share and $1.30 per share in 2005 and losses in its "Parent and Other" category to total between $0.08 per share and $0.13 per share in 2005. These ranges are unchanged from previous guidance.
The company operates New England's largest energy delivery system, serving approximately 2 million customers in Connecticut, New Hampshire and Massachusetts.
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