Eversource Energy — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited combined quarterly report for the three and six months ended June 30, 2016, with comparisons to 2015. 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 includes separate financial statements for CL&P, NSTAR Electric, PSNH and WMECO.
Key financial metrics
Amounts below are Eversource consolidated unless otherwise noted; dollar amounts are in millions.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Operating revenue | $1,767.2 | $1,817.1 | $3,822.8 | $4,330.5 |
| Operating income | $423.4 | $412.0 | $912.0 | $909.5 |
| Net income attributable to common shareholders | $203.6 | $207.5 | $447.8 | $460.8 |
| Diluted EPS | $0.64 | $0.65 | $1.41 | $1.45 |
| Operating margin | 24.0% | 22.7% | 23.9% | 21.0% |
- Cash flow and investment: First-half operating cash flow was $978.4 million, versus $865.3 million. Cash capital investment in property, plant and equipment was $869.2 million, versus $740.4 million; broader capital expenditures, including noncash items, were $905.0 million.
- Liquidity: Cash and cash equivalents were $38.7 million at June 30, compared with $23.9 million at December 31, 2015. Eversource parent had $438 million of commercial paper outstanding and $1.0 billion of remaining capacity under its $1.45 billion program, backed by a revolving facility through September 2020. NSTAR Electric had $329 million outstanding and $121 million of remaining capacity under its $450 million program and revolving facility.
- Debt: Consolidated long-term debt was $9.44 billion, with $178.9 million classified as current; notes payable were $767.0 million. Long-term debt carrying value increased from $8.81 billion at year-end 2015. The company issued $500 million of parent notes in March; NSTAR Electric issued $250 million of 2.70% debentures due 2026, and WMECO issued $50 million of 2.75% notes due 2026. NSTAR Electric also repaid $200 million of variable-rate debt at maturity.
- Dividends: Common dividends declared were $0.45 per share in Q2 and $0.89 per share in the first half, versus $0.42 and $0.84, respectively, in 2015. The Q2 payment was $0.445 per share.
Material changes versus prior comparable periods
- Q2 revenue fell 2.7%, while common earnings declined 1.9%. First-half revenue fell 11.7% and common earnings fell 2.8%. Revenue changes largely reflected lower energy supply costs and associated pass-through revenues, which generally do not affect earnings. Operating income increased slightly in both comparison periods.
- First-half electric sales volumes declined 5.0% and natural gas volumes declined 15.1%, principally due to unusually warm first-quarter weather compared with a colder-than-normal 2015 winter, and customer conservation. Q2 natural gas volumes rose 6.3% with cooler spring weather and customer growth.
- Electric distribution earnings were lower: $102.8 million in Q2 versus $121.6 million, and $211.3 million for the first half versus $252.1 million. Drivers included higher operations and maintenance, depreciation and property taxes, weather-related volume weakness, and the absence of favorable NSTAR Electric items recorded in early 2015.
- Transmission earnings rose to $92.5 million in Q2 from $80.4 million and to $178.2 million for the first half from $147.0 million, primarily from a higher transmission rate base and the absence of 2015 FERC ROE reserve charges.
- Natural gas distribution earnings were $8.0 million in Q2 versus $5.3 million; first-half earnings were $58.9 million versus $61.0 million. Q2 benefited from a rate increase and higher volumes, while the first-half comparison reflected warm-weather volume declines.
- First-half operating cash flow increased, mainly due to working-capital timing, regulatory recoveries and income-tax refunds; capital investment also increased. Interest expense rose 6.2% for the first half, primarily due to higher long-term debt interest.
Outlook, management commentary, risks and unusual items
- No consolidated EPS or earnings guidance is provided in the filing. Management cautions that interim results are not necessarily indicative of full-year results.
- PSNH generation divestiture: the NHPUC approved the restructuring agreement on July 1, 2016 and directed PSNH to begin divestiture. The company expected a sale before the end of 2017; the sale price could be below carrying value, while management considered recovery of remaining stranded costs through sale proceeds and future customer charges or rates probable.
- Transmission ROE complaints remain a material regulatory uncertainty. A FERC administrative law judge recommended a 9.59% base ROE for the second complaint period and 10.90% for the third; final FERC orders were expected in late 2016 or early 2017. Management said current reserves were appropriate but could not predict the outcome. A fourth complaint was also filed. The filing estimates that a 10-basis-point ROE change affects after-tax earnings by about $3 million per 15-month complaint period.
- On July 15, 2016, the Army Corps of Engineers sued NSTAR Electric, its subsidiary HEEC and another party over alleged permitting violations concerning an electric cable beneath Boston Harbor. The action seeks compliance or cable removal, penalties and costs; management says it intends to defend the case but cannot predict the outcome or financial impact.
- The Yankee Companies’ DOE spent-fuel litigation produced a final Phase III award of $76.8 million, finalized July 18, 2016. Proceeds are expected primarily to fund remaining fuel-storage obligations; timing and any customer refunds remain uncertain.
- Other notable exposures and plans: Eversource’s estimated environmental remediation reserves were $59.5 million at June 30, including $53.7 million for former manufactured-gas-plant sites. Access Northeast is a proposed approximately $3 billion project, with Eversource’s expected share about $1.2 billion and anticipated in-service dates beginning in November 2018, subject to approvals. Proposed solar projects would require estimated investment of $180–$200 million if approved.
- Management identifies regulatory and legislative actions, weather, customer demand and payment ability, capital-market access, interest rates, cyber and grid events, and project approvals among factors that could cause actual results to differ. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Final FERC ROE decisions, any related refunds or reserve adjustments, and the effect of the fourth complaint.
- Progress, auction outcome, sale proceeds and stranded-cost recovery for PSNH generation divestiture.
- Resolution and potential financial impact of the Boston Harbor cable lawsuit and the status of NSTAR Electric’s storm-cost recovery request for approximately $109 million.
- Actual capital spending, debt and commercial-paper balances, liquidity headroom, and continued cash-flow coverage of dividends and investment needs.
- Approvals, costs, schedules and customer-contract outcomes for Access Northeast, Northern Pass, transmission projects and proposed solar facilities.
- Whether first-half earnings and sales-volume trends persist after accounting for weather, regulatory mechanisms and the prior-year one-time benefits. The filing text does not provide a clear numeric full-year earnings forecast.