Northeast Utilities (NU) announced last Wednesday that following a previously announced comprehensive review of its competitive energy businesses it has decided to exit wholesale energy marketing and energy services, which are run by its competitive energy investment arm, NU Enterprises Inc. (NUEI). The company will stay in the competitive generation and retail energy marketing business.
Berlin, CT-based NU concluded that the wholesale merchant energy sector in the power pools between Maine and Maryland is becoming increasingly competitive and that NUEI's wholesale marketing business will be unable to attain the profit margins necessary to generate acceptable returns and cash flows, according to NU Chairman Charles W. Shivery.
While downsizing its competitive enterprises, NU expects to invest heavily in its regulated businesses, which represent more than 82% of its assets, over the next five years. NU operates New England's largest energy delivery system, serving two million customers in Connecticut, New Hampshire and Massachusetts.
The company will explore a number of alternatives for exiting the wholesale marketing business, including selling the wholesale marketing franchise, selling existing contracts, restructuring longer term contracts and allowing shorter term contracts to expire without being renewed. In the interim, NUEI will only bid on new full requirements wholesale contracts to improve the value of its book of business by reducing existing electric positions.
The energy service units also are not central to NU's long-term strategy and do not meet the company's expectations of profitability. As a result, NUEI 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.
Shivery said that Select Energy Inc., NUEI's marketing subsidiary, has built a very strong retail energy marketing franchise in the Northeast and Middle Atlantic states and that the company expects to build on that retail market presence. Additionally, the number of commercial and industrial customers buying their electricity and natural gas from competitive suppliers is continuing to rise.
Select Energy's retail marketing revenues in 2004 were $850 million on sales of 10 million MWh and 40 Bcf of natural gas. Select Energy's retail marketing business serves 30,000 commercial and industrial locations in the New England, New York and PJM power pools. Select's retail marketing business projects revenues to grow to $1 billion in 2005 because of a continued expansion of the retail market and its high customer retention rate of 85%.
NU will retain its 1,443 MW of competitive generating assets because it expects that their value could increase significantly in the coming years. The competitive generating assets, which include pumped storage, hydroelectric and coal-fired units, are contained within its Northeast Generation Co. (NGC) and Holyoke Water Power Co.(HWP) subsidiaries. NUEI also will retain its Northeast Generation Services Company subsidiary, which operates the NGC and HWP plants.
NUEI accounted for $2.1 billion of NU's revenue in 2004, excluding sales to affiliated regulated companies. The wholesale marketing business accounted for $1 billion of that revenue and NUEI's energy services accounted for $275 million. The energy services businesses include E. S. Boulos Co. and Woods Electrical Co., both electrical contractors; Woods Network Services Inc., a telecommunications contracting firm; Select Energy Contracting Inc., an electrical, mechanical, and plumbing contractor; and Select Energy Services Inc., a performance contracting subsidiary that specializes in upgrading the energy efficiency of large governmental and institutional facilities.
NU expects to record a charge in the first quarter of 2005 associated with the wholesale marketing and energy services businesses. The level of that charge will depend on a number of factors, including how the disposition of those businesses is accomplished. NU continues to work with the firm of Lazard Freres & Co., LLC, on that process.
Because of the variety of methods the company could use to implement its decisions concerning the wholesale marketing and energy services businesses, NU will not provide a 2005 earnings range for its competitive energy businesses.
Shivery said it is the company's goal to minimize layoffs by using, to the extent possible, open positions within the NU system or by a possible sale of both the wholesale franchise and the energy services businesses in which the buyers may offer positions to existing employees.
NU continues to estimate earnings of between $1.22 per share and $1.30 per share at its regulated businesses and parent company and other expenses of between $0.08 per share and $0.13 per share.
"The focus of Northeast Utilities' investments for the next several years will continue to be on improving the electricity and natural gas delivery systems of our franchised service territories in Connecticut, New Hampshire and Massachusetts," Shivery said. "These systems will require several billion dollars of investment over the next five years to maintain and improve an infrastructure that is central to the economic vitality and quality of life in New England. We have the financial strength to make those investments on behalf of our customers and investors and we intend to complete them with the support of our regulators."
The company operates Connecticut Light & Power, Public Service of New Hampshire, Western Massachusetts Electric, and the Yankee Energy System.
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