Eversource Energy — Q1 2016 Form 10-Q
Business context and period. This combined, unaudited filing covers the three months ended March 31, 2016, with prior-year comparisons for Q1 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. Subsidiary results are included in the filing; consolidated figures below refer to Eversource.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Operating revenue | $2.056 billion | $2.513 billion |
| Operating income | $488.5 million | $497.5 million |
| Net income attributable to common shareholders | $244.2 million | $253.3 million |
| Diluted EPS | $0.77 | $0.80 |
| Operating cash flow | $500.0 million | $491.5 million |
| Capital investment in property, plant and equipment | $431.5 million | $362.6 million |
| Cash and cash equivalents at period end | $51.0 million | $23.9 million at Dec. 31, 2015 |
Operating margin was approximately 23.8% versus 19.8%; the comparison is affected by energy-supply costs and other pass-through revenue and expense. Operating cash flow less reported plant investment was approximately $68.5 million before dividends and other financing needs.
At March 31, Eversource reported $9.145 billion of long-term debt, $378.9 million of current long-term debt, and $769.5 million of notes payable. The parent had $621 million outstanding under its commercial-paper program and $829 million of unused capacity; the combined $1.45 billion revolving facility backs that program. In March, the parent issued $500 million of senior notes—$250 million at 2.50% due 2021 and $250 million at 3.35% due 2026—to repay commercial paper.
The declared common dividend was $0.45 per share for Q1 (reported as $0.445); the board also approved $0.445 per share for payment in June 2016.
Changes versus the prior comparable period
- Revenue fell 18.2%, while common net income declined 3.6% and diluted EPS fell from $0.80 to $0.77. Lower energy-supply costs and sales volumes reduced both revenues and related pass-through expenses.
- Warmer-than-normal weather drove lower usage: retail electric sales volumes fell 8.5%, and firm natural gas volumes fell 22.2%. Management cited this weather comparison as a key pressure on distribution earnings.
- Segment earnings were $108.4 million for electric distribution, down from $130.6 million; $85.7 million for electric transmission, up from $66.6 million; and $50.9 million for natural gas distribution, down from $55.6 million.
- Transmission earnings benefited from the absence of prior-year FERC ROE complaint reserves and a larger transmission rate base. Electric distribution was pressured by the absence of prior-year NSTAR Electric settlement benefits, lower sales at certain utilities, and higher depreciation and property taxes. Gas distribution earnings were affected by lower weather-driven volumes.
- Operating cash flow increased modestly, while plant investment rose. Management attributed stronger cash flow primarily to working-capital and collection timing, regulatory recoveries, and income-tax refunds.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no consolidated earnings guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- FERC ROE proceedings: An 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. Eversource retained existing reserves, stating that it could not predict the outcome. A fourth complaint was filed April 29, 2016. Management estimated that a 10-basis-point change in base ROE could affect after-tax earnings by about $3 million for each 15-month complaint period.
- PSNH generation divestiture: The proposed agreement and divestiture remained subject to New Hampshire regulator approval, expected in 2016. If approved, plant sales were expected in the first half of 2017. PSNH agreed to forgo $25 million of deferred Clean Air Project equity return, contribute $5 million to a non-customer-funded clean-energy fund, and not seek a general distribution-rate increase effective before July 2017. Management considered recovery of generation assets probable through operations, sale proceeds, and future customer rates.
- Projects and execution: Access Northeast was estimated to cost approximately $3 billion overall, with Eversource’s expected share about $1.2 billion; it required regulatory approvals and anticipated service dates beginning in November 2018. The Northern Pass estimate had risen from $1.4 billion to $1.6 billion after a route change and remained subject to permitting and selection processes.
- Legal and environmental matters: The Yankee Companies received a March 25, 2016 court award of $76.8 million of $77.9 million sought for DOE spent-fuel damages; appeals remained possible, and any amounts refunded to utility customers would ultimately be passed to customers. Eversource reported environmental reserves of $51.7 million across 64 sites, including $46.1 million related to former manufactured-gas-plant sites; estimates could change as remediation information develops.
- Accounting and other items: Adoption of share-based compensation guidance reduced Q1 income-tax expense by $2.5 million. A revised pension and PBOP cost methodology provided a pre-tax benefit of approximately $14.5 million before capitalization and regulatory deferrals. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Forward-looking risks include regulatory decisions, weather, customer demand and payment ability, capital-market access and cost, capital spending, cybersecurity and grid disruptions, and changes in law, policy, and accounting standards.
Most important facts for investors to verify
- Whether final FERC ROE orders or the fourth complaint change transmission revenue, customer refunds, or recorded reserves.
- Regulatory approval, sale timing and proceeds for PSNH generation assets, and the ultimate treatment of stranded costs.
- Whether weather-normalized customer usage and distribution earnings recover after the unusually warm quarter.
- Execution, permitting, cost estimates, and funding for Access Northeast, Northern Pass, and other major transmission investments.
- Cash generation relative to capital spending, dividends, and debt requirements; confirm reported debt and available borrowing capacity against subsequent filings.
- Whether environmental, pension, and other regulatory asset recovery assumptions remain probable and whether associated estimates or reserves change.