Eversource Energy (Northeast Utilities) — 2011 Form 10-K
Business context and reporting period. This filing is Northeast Utilities’ annual report for the year ended December 31, 2011—not a standalone fourth-quarter report. The company operated regulated electric distribution and transmission utilities in Connecticut, New Hampshire and western Massachusetts, and a natural-gas distribution utility in Connecticut. PSNH also owned generation assets. The financial statements were audited by Deloitte & Touche, which issued an unqualified opinion; management reported effective internal control over financial reporting.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | $4.466 billion | $4.898 billion | Down 8.8% |
| Operating income | $794.2 million | $799.9 million | Down 0.7% |
| Net income attributable to controlling interests | $394.7 million | $387.9 million | Up 1.7% |
| Diluted EPS | $2.22 | $2.19 | Up $0.03 |
| Operating cash flow, as presented in audited cash-flow statement | $970.4 million | $1.093 billion | Down $123.1 million |
| Operating cash flow, net of rate-reduction-bond payments, per MD&A | $901.1 million | $832.6 million | Up $68.5 million |
| Cash and cash equivalents at year-end | $6.6 million | $23.4 million | Down $16.8 million |
Operating margin was approximately 17.8% versus 16.3% in 2010; net margin was approximately 8.8% versus 7.9%. These ratios are calculated from reported figures and should be read in light of substantial pass-through energy revenues and costs. 2011 cash capital expenditures were $1.077 billion, up from $954.5 million. The company declared $1.10 per share in dividends, versus $1.03 in 2010.
At year-end, NU reported $4.615 billion of long-term debt, $331.6 million of current long-term debt, $317.0 million of bank notes payable and $112.3 million of rate-reduction bonds. Cash was limited, while revolving facilities provided additional borrowing capacity; NU parent had $256 million outstanding on its $500 million facility, with $226.1 million available. The companies reported compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Revenue fell mainly because lower energy supply costs, stranded-cost recoveries and other tracked charges reduced reported revenue; these amounts generally pass through to customers and do not directly determine earnings.
- Net income and diluted EPS increased modestly. Rate-case increases, higher transmission investment, cost management and lower uncollectible expense supported results; higher pension costs, depreciation, property taxes, lower electric sales and storm-related costs were offsets.
- NU reported 2011 GAAP EPS of $2.22. Excluding $11.3 million of merger costs and the $17.9 million after-tax CL&P storm-fund charge, management’s non-GAAP EPS was $2.38, compared with $2.16 in 2010 after its stated adjustments.
- Retail electric sales declined 1.2% overall, or 0.3% on a weather-normalized basis. Yankee Gas firm natural-gas sales rose 8.0% actual and 5.1% weather-normalized.
- Transmission segment earnings increased to $199.6 million from $177.8 million, primarily reflecting a higher transmission investment base. Regulated-company earnings before the CL&P storm-fund charge were $438.3 million; after that charge they were $420.4 million.
Outlook, risks and unusual items
- 2012 outlook: NU did not provide standalone EPS guidance, citing the pending NSTAR merger. Management expected 2012 earnings to face higher pension expense (about $15 million after tax), higher CL&P reliability spending and a higher effective tax rate, partly offset by transmission rate-base growth, lower parent interest costs and distribution rate increases. Standalone operating cash flow was expected to be lower, including because of higher pension contributions and customer bill credits.
- Storms: Tropical Storm Irene and the October 2011 snowstorm caused estimated incremental restoration costs of $354.1 million: $311.7 million deferred for future recovery and $42.4 million capitalized. Recovery depends on regulatory processes and prudence reviews. CL&P separately recorded a $30 million pre-tax reserve ($17.9 million after tax) for customer credits and charitable contributions; it will not seek rate recovery of this amount.
- Merger: The proposed merger with NSTAR was structured as a 1.312 NU-share exchange for each NSTAR share. At filing, PURA and Massachusetts DPU approvals remained pending; management expected completion by April 16, 2012 if acceptable decisions were received. Settlement terms proposed a distribution-rate freeze through 2016 for WMECO and specified NSTAR utilities. Merger failure, conditions on approval or integration difficulties could affect results and share value.
- Major investment and regulatory exposure: The Merrimack Clean Air Project was expected to cost about $422 million and faced NHPUC rate-treatment and prudence review. The EPA’s draft Merrimack permit proposed closed-cycle cooling, with an estimated $112 million net-present-value cost over 20 years. A FERC complaint sought to reduce the New England transmission base ROE from 11.14% to 9.2%; the outcome was unresolved. Northern Pass was estimated at about $1.1 billion total, including an estimated $830 million NU share, and remained exposed to permitting, route and eminent-domain risks.
- Pensions and environmental matters: NU contributed $143.6 million to its pension plan in 2011 and estimated 2012 contributions of $197.3 million. The year-end environmental remediation liability was $31.7 million for 59 sites; actual costs could be higher as site information develops.
- Other risks and contingencies: The filing identifies regulatory cost-recovery risk, severe weather, system reliability and cybersecurity risks, capital-market access, customer migration at PSNH, environmental compliance, and litigation including spent-nuclear-fuel and Clean Air Act proceedings.
Important facts for investors to verify
- Whether the NSTAR merger received all required approvals, closed on the expected terms and delivered anticipated benefits.
- How much of the $311.7 million in deferred storm costs regulators ultimately allowed the utilities to recover, and whether storm reviews required additional spending or rate concessions.
- The outcome and financial effect of the FERC transmission ROE complaint and the NHPUC review of the Clean Air Project.
- Whether the proposed Merrimack cooling-system requirement or other environmental rules lead to material capital costs beyond amounts identified in the filing.
- Actual 2012 operating cash flow, pension contributions, debt refinancing and capital spending versus management’s expectations.
- Progress, final costs, permitting and schedule for Northern Pass and other major transmission projects.