Eversource Energy — Q2 2015 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2015, compared with the same 2014 periods. Eversource is a regulated energy-delivery holding company serving approximately 3.6 million electric and natural-gas customers in Connecticut, Massachusetts and New Hampshire. The filing also reports separately on CL&P, NSTAR Electric, PSNH and WMECO. The parent’s legal name changed from Northeast Utilities to Eversource Energy on April 30, 2015.
Key financial metrics
Unless stated otherwise, amounts are for Eversource consolidated and in millions of dollars; EPS is per common share.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Operating revenue | $1,817.1 | $1,677.6 | $4,330.5 | $3,968.2 |
| Operating income | $412.0 | $294.0 | $909.5 | $761.7 |
| Net income attributable to controlling interest | $207.5 | $127.4 | $460.8 | $363.3 |
| Diluted EPS | $0.65 | $0.40 | $1.45 | $1.15 |
| Operating margin | 22.7% | 17.5% | 21.0% | 19.2% |
- Revenue increased 8.3% in Q2 and 9.1% in the first half; controlling-interest net income rose 62.9% and 26.8%, respectively. Reported earnings included integration costs; management’s non-GAAP diluted EPS excluding these costs was $0.66 for Q2 and $1.47 for the first half, versus $0.42 and $1.18 in 2014.
- First-half operating cash flow was $855.6 million, down from $896.7 million. Capital investment in property, plant and equipment was $740.4 million, up from $724.0 million. Cash and cash equivalents were $36.5 million at June 30, versus $38.7 million at year-end 2014.
- At June 30, current assets were $2.45 billion and current liabilities $2.84 billion. Consolidated notes payable, current debt and long-term debt totaled approximately $9.92 billion, compared with approximately $9.81 billion at year-end 2014. These debt figures include short-term borrowings.
- Eversource parent had $576.5 million of commercial-paper borrowings and $873.5 million of available capacity under its $1.45 billion program; NSTAR Electric had $377.2 million outstanding and $72.8 million available under its $450 million program.
- Common dividends declared were $0.42 per share in Q2 and $0.84 for the first half. The June payment was $0.4175 per share.
Material changes versus the prior comparable period
- Higher earnings reflected distribution rate increases, approved regulatory settlements, lower operating and maintenance expense, increased transmission investment and the absence of a large prior-year transmission ROE reserve. Some settlement and regulatory adjustments were nonrecurring.
- Revenue growth also reflected higher energy supply and other tracked charges, which are generally recovered from customers and do not have a corresponding earnings effect. Purchased power, fuel and transmission costs rose $60.9 million in Q2 and $244.8 million in the first half.
- First-half retail electric volumes increased 0.3%; firm natural-gas volumes rose 5.5%, aided by colder winter weather and customer growth. Weather-normalized electric sales declined, which management attributed primarily to conservation and efficiency programs.
- Operating cash flow declined mainly because of timing of regulatory recoveries and working-capital collections and the absence of $125.7 million of DOE damages proceeds received in 2014; 2015 tax refunds partly offset the decline.
Outlook, commentary, risks and unusual items
- The filing provides no clear numerical full-year earnings or EPS guidance. Management described ongoing regulated utility investment and projects, including transmission upgrades, gas infrastructure work and the proposed Access Northeast pipeline project.
- PSNH agreed to pursue sale of its generation assets, subject to New Hampshire regulatory approval. The agreement includes a $5 million nonrecoverable clean-energy contribution, foregoing $25 million of deferred equity return, and no general distribution rate increase before July 1, 2017. Remaining stranded costs are expected to be recovered through bonds supported by a non-bypassable customer charge. Approval was expected in late 2015.
- FERC’s March 2015 order affirmed a 10.57% base transmission ROE for the first complaint period and prospectively, with an 11.74% cap on total ROE. Eversource recorded a $20 million pretax charge in the first half. Appeals were pending; additional ROE complaint proceedings could result in further rate changes or refunds.
- NSTAR Electric recorded a $24.2 million regulatory asset and reduced first-quarter operating expense following a DPU order on energy-related bad debt costs. The DPU delayed the proposed customer rate increase to November 1, 2015 while reviewing reconciliations.
- Other notable items included a $21.7 million pretax NSTAR Electric benefit from a settlement of multiple Massachusetts dockets, the sale of substantially all E.S. Boulos assets in April, and $10.7 million of additional CL&P revenue recorded in Q2 under a rate-base settlement.
- Principal risks include regulatory decisions and cost recovery, unresolved ROE proceedings, project permitting and execution, weather and demand, access to capital, credit ratings, environmental obligations, and cyber or grid disruptions. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Reconcile reported GAAP earnings with management’s non-GAAP results and identify how much of the year-over-year improvement came from rate actions, settlements and prior-year reserve comparisons.
- Track the outcome and timing of the FERC ROE appeals and later complaint proceedings, including potential customer refunds and earnings effects.
- Confirm NHPUC approval, sale terms and timing for PSNH generation divestiture, and the amount and recovery mechanism for stranded costs.
- Assess short-term borrowing levels, available credit capacity, capital spending and cash conversion; first-half operating cash flow was below capital investment.
- Monitor regulatory approval and collection schedules for the NSTAR Electric bad-debt recovery and CL&P rate-base settlement, as well as permitting and cost estimates for major transmission and gas projects.