Business context and reporting period
Northeast Utilities (NU), the parent of regulated electric and natural-gas utilities serving approximately 3.6 million customers in Connecticut, Massachusetts, and New Hampshire, filed this unaudited Form 10-Q for the quarter ended June 30, 2013. The filing also includes separate results for CL&P, NSTAR Electric, PSNH, and WMECO. NU’s 2012 results include NSTAR only from the April 10, 2012 merger date, making first-half comparisons materially affected by the acquisition.
Key financial metrics
NU consolidated amounts below are in millions, except per-share data. Results are GAAP unless indicated otherwise.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $1,635.9 | $1,628.7 | $3,630.9 | $2,728.3 |
| Operating income | $350.6 | $159.5 | $769.5 | $373.9 |
| Net income attributable to controlling interest | $171.0 | $44.3 | $399.1 | $143.6 |
| Diluted EPS | $0.54 | $0.15 | $1.26 | $0.60 |
| Cash provided by operating activities | Not separately provided for the quarter | $769.0 | $320.4 | |
| Cash capital expenditures | Not separately provided for the quarter | $700.3 | $690.4 |
Q2 operating margin was approximately 21.4%, compared with 9.8% a year earlier. First-half reported revenue and earnings growth reflect, in significant part, the inclusion of NSTAR for the full 2013 period but only from April 10 in 2012. Management also reported first-half operating cash flow of $686.9 million net of rate-reduction-bond payments, versus $284 million on the same basis in 2012.
At June 30, 2013, NU reported cash of $36.1 million, total assets of $28.2 billion, and total capitalization of $17.2 billion. Listed borrowings included $794.5 million of notes payable, $888.3 million of current long-term debt, and $7.65 billion of long-term debt. Current liabilities exceeded current assets by approximately $1 billion. Management cited approximately $857 million of debt maturities payable within 12 months and said operating cash flows and market access should support funding needs.
Material changes versus the prior comparable period
- Q2 earnings attributable to controlling interest rose to $171.0 million from $44.3 million. Management cited lower operations and maintenance costs, higher transmission earnings from infrastructure investment, and higher retail electric and firm natural-gas sales. The 2012 quarter included substantial merger- and settlement-related costs.
- First-half reported revenue increased 33.1% and operating income more than doubled, but the comparison is not like-for-like because of NSTAR’s merger timing. Excluding integration and merger-related costs, management reported first-half earnings of $402.6 million, or $1.27 per share, versus $236.2 million, or $0.98 per share.
- Operating cash flow improved year over year; management attributed this to NSTAR, lower storm-related cash outlays and pension contributions, and the absence of prior-year customer bill credits and merger costs. Cash capital expenditures remained substantial at $700.3 million.
- NU issued $750 million of senior notes in May; CL&P issued $400 million of 2.5% first-mortgage bonds in January; NSTAR Electric issued $200 million of floating-rate debentures in May. PSNH also redeemed approximately $109 million of pollution-control bonds using short-term debt.
Outlook, commentary, risks, and unusual items
- No specific consolidated earnings guidance was provided in the supplied filing text. Management expected operating cash flows and access to capital markets to meet operating and forecast investment needs.
- Management identified weather, customer demand and conservation, storm damage, regulatory actions, capital-market access, interest rates, credit ratings, and execution of merger synergies among factors that could cause actual results to differ from expectations.
- A FERC proceeding challenges the 11.14% base return on equity used in regional transmission rates; complainants and FERC trial staff supported a rate of 9% or less. NU said the outcome and financial impact could not yet be predicted; each 10-basis-point change could alter annual consolidated earnings by about $2.1 million.
- Approximately $700 million of major-storm restoration costs had been deferred for future recovery. Management considered recovery probable, but each utility must pursue recovery through regulatory processes. Other proceedings include review of PSNH’s Clean Air Project prudence and New Hampshire consideration of PSNH’s generation assets and default-service market.
- FERC’s transmission-planning order may expose some longer-term reliability and public-policy projects to competition; the final rules and effects remained uncertain. The $1.4 billion Northern Pass project remained subject to federal and state permitting and was expected to be operational by mid-2017.
- Unusual comparison items included 2012 merger and settlement charges and a favorable $13.6 million first-quarter 2013 state income-tax audit resolution benefit cited by management. A Massachusetts law enacted in July 2013 raises the income-tax rate applicable to utility companies from 6.5% to 8% effective January 1, 2014.
Important facts for investors to verify
- Reconcile reported GAAP cash from operations with management’s net-of-rate-reduction-bond cash-flow measure, and assess recurring cash generation against capital spending and dividends.
- Review the timing and refinancing plan for near-term debt maturities, current-liability deficits, and short-term borrowings.
- Track FERC’s base-ROE case, including potential refunds and prospective rate changes, and state proceedings affecting storm-cost recovery and PSNH generation.
- Assess earnings comparability by separating NSTAR’s acquisition contribution, merger-related costs, tax-audit benefit, weather effects, and rate-tracker revenues and expenses.
- Monitor permitting, cost, and schedule developments for major transmission projects, particularly Northern Pass and GSRP.