Eversource Energy — Third-Quarter 2016 Form 10-Q
Business context and reporting period. This combined quarterly filing covers Eversource Energy and four named utility subsidiaries for the quarter and nine months ended September 30, 2016. Eversource is a regulated energy-delivery company serving approximately 3.6 million electric and natural-gas customers in Connecticut, Massachusetts, and New Hampshire. Results are unaudited; the company cautions that interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $2.040 billion | $1.933 billion | $5.863 billion | $6.264 billion |
| Operating income | $509.9 million | $469.2 million | $1.422 billion | $1.379 billion |
| Net income attributable to common shareholders | $265.3 million | $235.9 million | $713.1 million | $696.7 million |
| Diluted EPS | $0.83 | $0.74 | $2.24 | $2.19 |
| Operating margin, approximate | 25.0% | 24.3% | 24.3% | 22.0% |
- Nine-month operating cash flow was $1.650 billion, versus $1.351 billion a year earlier. Cash capital investment was $1.359 billion, versus $1.177 billion.
- At September 30, cash and equivalents were $40.1 million. Total assets were $31.08 billion and common shareholders’ equity was $10.64 billion.
- Long-term debt, including its current portion, was approximately $9.61 billion; notes payable were $734.5 million. Eversource parent had $698.5 million of commercial paper outstanding and NSTAR Electric had $36 million. The filing reports no outstanding borrowings under the revolving credit facilities, which total $1.45 billion for the parent group and $450 million for NSTAR Electric.
- Declared dividends were $0.45 per common share for the quarter; cash common dividends paid in the first nine months totaled $423.5 million.
Changes versus the prior comparable period
- Third-quarter revenue increased 5.5% and common net income increased 12.5%; nine-month revenue declined 6.4% while common net income rose 2.4%.
- The revenue decline over nine months mainly reflected lower energy-supply costs and reduced electric and natural-gas sales volumes. Much of supply-related revenue and expense is tracked and recovered from customers, so changes in these pass-through amounts generally do not affect earnings.
- Transmission earnings improved as investment increased the rate base and the period lacked certain 2015 FERC ROE-related reserve charges. Nine-month NSTAR Electric earnings fell $44.2 million, largely due to the absence of favorable 2015 items, lower sales volumes, and higher operating costs. Natural-gas sales volumes were affected by warmer-than-normal first-quarter weather.
- Cash from operations increased year over year, with management citing regulatory collections, income-tax payment/refund timing, lower pension contributions, and accounts-payable timing among the drivers. Capital investment also increased.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific consolidated earnings or EPS guidance. Management identifies weather, conservation, regulation, capital-market access, interest rates, customer demand, cyber and grid risks, and changing laws and policies as factors that could affect results.
- Access Northeast faces significant regulatory setbacks: Massachusetts’ Supreme Judicial Court and the New Hampshire PUC ruled that the relevant agencies lacked authority to approve the proposed utility gas-capacity contracts; Connecticut canceled its review process. Eversource and its partners are assessing alternatives, and project timing, design, and cost may change.
- Northern Pass and Clean Energy Connect were not selected in the three-state clean-energy solicitation, as announced October 24, 2016. Northern Pass remained subject to permitting; the company was pursuing later contracting opportunities. Its plans and related customer benefits are contingent on project approval and operation.
- PSNH’s generation-asset divestiture process was approved by the New Hampshire PUC in July 2016. An auction plan was expected in the fourth quarter of 2016, with sale anticipated before the end of 2017, subject to approval. Management believes recovery of the assets and stranded costs is probable through operations, sale proceeds, and future rates.
- FERC ROE complaints remain unresolved. The administrative law judge recommended a 9.59% base ROE for the second complaint period and 10.90% for the third, versus the 10.57% base ROE then used by the company; final orders were expected in late 2016 or early 2017. A fourth complaint was also set for hearing. Management said it could not predict outcomes and considered existing reserves appropriate.
- A U.S. Army Corps of Engineers civil action alleges permitting violations concerning an NSTAR Electric cable beneath Boston Harbor and seeks compliance or removal, as well as penalties and costs. Management says it intends to defend the case; the financial impact is not predictable.
- Environmental remediation reserves were $59.7 million for Eversource, including $53.9 million related to former manufactured-gas-plant sites. Separately, Eversource expected approximately $26 million from DOE spent-nuclear-fuel litigation awards, subject to regulatory approval; amounts received by utility subsidiaries were expected to be refunded to customers.
- Notable accounting and benefit items: adoption of share-based compensation guidance reduced nine-month income-tax expense by $2.9 million. A PBOP plan remeasurement reduced its benefit obligation by about $102 million and regulatory assets by about $106 million; most of the resulting estimated 2016 periodic-cost decrease was expected to be deferred for future customer refunds.
- Management reported effective disclosure controls. A new timekeeping and human-resources system implemented in Q3 materially changed internal controls over financial reporting; the filing describes testing and reviews undertaken during implementation.
Important facts for investors to verify
- Track final FERC ROE decisions and any resulting changes to transmission revenues, customer refunds, or reserves.
- Monitor regulatory and commercial alternatives for Access Northeast, and the permitting, contracts, and financing milestones for Northern Pass and other transmission projects.
- Follow PSNH’s generation auction, sale proceeds, and the treatment and recovery of stranded costs.
- Assess the sustainability of operating cash flow against the elevated capital program, dividends, and debt requirements; distinguish tracked energy revenues and expenses from earnings-sensitive items.
- Review developments in the Boston Harbor litigation, environmental remediation estimates, and the customer refunds associated with DOE awards and benefit-plan changes.