Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008, for EverSource Energy (operating as Northeast Utilities and subsidiaries). The filing includes consolidated financial statements for 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 providing electric and gas distribution and transmission services in Connecticut, New Hampshire, and Massachusetts, alongside a shrinking unregulated wholesale energy marketing segment (NU Enterprises).
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Operating Revenues | $1,519.97 million | $1,703.52 million |
| Operating Income | $132.27 million | $155.73 million |
| Net Income | $58.39 million | $75.09 million |
| Diluted EPS | $0.38 | $0.49 |
| Operating Cash Flow | $96.34 million | ($266.61 million) |
| Total Assets | $12,343.78 million | $11,581.82 million |
| Long-Term Debt | $3,494.16 million | $3,483.60 million |
| Cash and Cash Equivalents | $24.97 million | $15.10 million |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by $16.7 million (22%) year-over-year. This decline was primarily driven by a one-time after-tax charge of $29.8 million ($0.19 per share) related to the settlement of litigation with Consolidated Edison, Inc. (Con Edison) regarding a failed 2001 merger. Excluding this charge, adjusted earnings would have been $88.2 million ($0.57 per share).
- Revenue Decrease: Operating revenues fell $183.5 million (11%). This was due to lower regulated company revenues ($144 million) driven by reduced pass-through costs for energy supply and lower revenues from NU Enterprises ($39 million) as competitive businesses were exited.
- Expense Reductions: Fuel, purchased, and net interchange power expenses decreased significantly by $247.2 million (23%), largely due to lower energy supply costs and the exit of competitive generation businesses. However, "Other operation" expenses increased by $49 million, primarily due to the $49.5 million Con Edison settlement payment.
- Cash Flow Improvement: Operating cash flows turned positive at $96.3 million compared to a negative $266.6 million in Q1 2007. The 2007 figure was heavily impacted by approximately $400 million in tax payments related to the 2006 sale of competitive generation businesses.
- Capital Expenditures: Cash capital expenditures increased to $288.1 million from $227.7 million, driven by significant transmission infrastructure investments, particularly at CL&P.
Guidance, Outlook, and Risks
- 2008 Earnings Guidance: Management projects consolidated 2008 earnings between $1.45 and $1.70 per share (including the Con Edison charge) and between $1.65 and $1.90 per share (excluding the charge).
- Regulatory Developments:
- FERC ROE Order: The Federal Energy Regulatory Commission (FERC) issued a rehearing order increasing the base Return on Equity (ROE) for transmission projects from 10.2% to 10.4% effective February 1, 2005. This resulted in $3.5 million in recognized transmission earnings in Q1 2008.
- Rate Increases: CL&P implemented a $77.8 million annualized distribution rate increase effective February 1, 2008. PSNH and WMECO also implemented rate increases effective January 1, 2008.
- Capital Projects: CL&P is actively constructing three major transmission projects in southwest Connecticut (Middletown-Norwalk, Glenbrook Cables, and Long Island Replacement Cable), with completion expected in 2008 and early 2009.
- Risks and Contingencies:
- Con Edison Settlement: The $49.5 million payment is not recoverable from ratepayers.
- Environmental Remediation: Holyoke Water Power Company (HWP) faces potential additional remediation costs for a tar deposit site in Massachusetts. A $0.5 million reserve exists, but management notes costs could increase materially.
- Derivative Valuation: Adoption of SFAS No. 157 resulted in a $6.1 million pre-tax charge to earnings related to NU Enterprises' wholesale contracts. Significant fair value changes in regulated company derivatives are offset by regulatory assets/liabilities.
Investor Verification Checklist
- Con Edison Settlement Impact: Verify the non-recurring nature of the $49.5 million charge and confirm the $19.7 million tax benefit offset expected in the remainder of 2008.
- Transmission Project Costs: Monitor the capital expenditure trajectory for CL&P's southwest Connecticut projects, specifically the Middletown-Norwalk project, to ensure costs remain within the estimated $1.05 billion budget.
- Regulatory ROE Recovery: Confirm the timing and magnitude of earnings recovery from the FERC ROE order, particularly the 100 basis point adder for projects completed by December 31, 2008.
- NU Enterprises Wind-down: Track the fair value of remaining wholesale derivative contracts (currently a net liability of $81.1 million) and the timeline for exiting these positions.
- Environmental Reserve Adequacy: Review updates on the HWP tar site remediation to assess the risk of the $0.5 million reserve being insufficient.