A spate of newly announced deals, including Allegheny Energy’s proposed $9.27 billion acquisition of FirstEnergy, plus PPL’s takeover of E.ON US for $6.73 billion, has left the utility industry...
The Finance Forum: Growth in a Back-to-Basics World
- The status of power supply contracts between bankrupt NRG and the NU subsidiary Connecticut Light & Power Co. (CL&P); and
- The legal affair over the failed merger with ConEd.
Certainly, with all this financial uncertainty tied to the utility's various regulatory bouts, one might be forgiven for putting odds against the company. But John Forsgren, vice chairman and CFO at Northeast Utilities System, says it won't pay to bet against this company. "I think if you look at a probability analysis of all those issues and look at 2003 versus 2004 and the future, the probability is on balance that those things will come out more favorable to us than more negative. And even with very conservative assumptions in our planning, we look pretty well set to achieve very decent earnings growth," he says.
And Forsgren does have good reason to believe his company will be the one left standing after all is said and done, as financial conditions at the utility already appear to be improving. Northeast Utilities has been able to restore its competitive energy marketing subsidiary to profitability after several years of losses, Forsgren says. The utility's competitive subsidiary earned $11.9 million in the second quarter 2003 and $17.1 million in the first half of 2003, compared with a loss of $9.2 million in the second quarter of 2002 and a loss of $29.7 million in the first half of 2002.
Specifically, the turnaround is attributed to improved results in the wholesale business, the absence of energy trading losses, better performance in the retail energy and services businesses, and heavier precipitation in southern New England, according to company press materials. Not to put it mildly, Forsgren says the company is having a good year. In fact, the company was emboldened, as were financial markets, when the Connecticut legislature approved energy-related legislation in May that would allow an increase in electricity rates by up to 10 percent beginning in January 2004 and extends the transition period by three years to year-end 2006 for all electric distribution companies in Connecticut (the increase calculation excludes any federally mandated congestion costs).
Furthermore, Forsgren says that after dealing with the learning curve caused by the restructuring process, he feels the company is "properly structured to continue making money and to make money within a reasonable risk profile that the utility parent can live with." On the regulated side of the business his plan is to grow the rate base. "We cut rate base almost in half as we went through restructuring by selling off all of our generation. So now we're rebuilding rate base as we invest in transmission and distribution. Unfortunately, we are in a region that needs a lot of upgrading of transmission distribution so we have opportunities to invest. As we recover that investment we'll rebuild rate base and transfer that growth," he says.
On the unregulated side of the business, he sees opportunities for growth in going more aggressively into neighboring markets, i.e., New York and PJM. "We think retail is attractive. We don't have any plans to market