Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, for EverSource Energy (filing as Northeast Utilities and subsidiaries). The registrant includes Northeast Utilities (NU), The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The company operates primarily as a regulated utility with segments for electric distribution, gas distribution, and transmission, alongside a competitive wholesale energy business (NU Enterprises).
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric | Value (in millions) |
|---|---|
| Operating Revenues | $2,845.3 |
| Operating Income | $270.4 |
| Net Income | $116.2 |
| Earnings Per Share (Diluted) | $0.75 |
| Operating Cash Flow | $279.0 |
| Capital Expenditures (Cash) | $625.1 |
| Total Assets | $12,709.3 |
| Long-Term Debt | $4,090.3 |
| Cash and Cash Equivalents | $12.1 |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased by $250 million (8%) compared to the first half of 2007. This was driven by lower revenues from NU Enterprises ($80 million) due to the exit from competitive businesses and lower regulated company revenues ($170 million) due to reduced pass-through costs for energy supply.
- Net Income Decrease: Consolidated net income fell by $7.4 million (6%) to $116.2 million. This decline was primarily due to a $29.8 million after-tax charge ($0.19 per share) resulting from the settlement of litigation with Consolidated Edison (Con Edison). Excluding this charge, earnings would have been $146 million.
- Segment Performance:
- Transmission: Earnings increased significantly ($30.7 million for the six months) due to a higher investment base and favorable FERC regulatory decisions regarding Return on Equity (ROE).
- Distribution: Earnings were impacted by lower sales volumes (weather-normalized decreases) and regulatory charges, including a $5.8 million refund requirement for Yankee Gas and a $1.6 million charge for WMECO related to transition cost reconciliations.
- Capital Expenditures: Cash capital expenditures increased by $134 million to $625.1 million, driven largely by transmission infrastructure projects at CL&P.
Guidance, Outlook, and Risks
- 2008 Earnings Guidance: Management revised its full-year 2008 earnings guidance to $1.60 to $1.75 per share (GAAP), which includes the Con Edison settlement charge. Excluding the charge, guidance is $1.80 to $1.95 per share.
- Regulatory Developments:
- FERC ROE: The FERC granted a waiver for CL&P's Middletown-Norwalk project, approving a 100 basis point ROE adder and an additional 50 basis point adder for advanced technology, expected to increase annual earnings by ~$1 million starting in 2009.
- Rate Cases: CL&P, PSNH, and WMECO are expected to file distribution rate cases in 2009. Massachusetts regulators mandated full decoupling proposals for all utilities.
- Contingencies and Risks:
- Environmental: Holyoke Water Power (HWP) recorded a $3 million charge for tar remediation studies. The remaining reserve is $3.3 million, but costs could increase if further remediation is required.
- Derivatives: Adoption of SFAS No. 157 resulted in a $6.1 million pre-tax charge for NU Enterprises' wholesale contracts. Significant fair value changes in regulated company derivatives are offset by regulatory assets/liabilities.
- Counterparty Credit: Select Energy has exposure to counterparty credit risk; a downgrade of NU parent's credit rating could require posting additional collateral.
Investor Verification Checklist
- Con Edison Settlement Impact: Verify the non-recurring nature of the $29.8 million charge and its exclusion from forward-looking operational performance.
- Transmission Project Timelines: Confirm the completion dates and cost estimates for the Middletown-Norwalk, Glenbrook Cables, and Long Island Replacement Cable projects, as delays could impact rate base recovery.
- Regulatory Asset Recovery: Assess the probability of recovering regulatory assets related to the $590 million increase in CL&P derivative liabilities and the $3.3 million HWP environmental reserve.
- Sales Volume Trends: Monitor weather-normalized sales trends, particularly the decline in industrial and commercial electric sales, to evaluate the effectiveness of rate design in mitigating volume risk.
- Debt Issuance Terms: Review the terms of the $660 million in long-term debt issued in the second quarter to understand future interest obligations and covenant compliance.