Business context and reporting period
Northeast Utilities (NU), which began doing business as Eversource Energy on February 2, 2015, filed this combined Form 10-K for the year ended December 31, 2014. The report also covers its regulated electric and gas utilities, including CL&P, NSTAR Electric, PSNH, WMECO, NSTAR Gas and Yankee Gas. The business is primarily regulated electricity and natural-gas delivery, with electric transmission and limited generation. Figures below are for full-year 2014 unless noted; the filing’s fourth-quarter figures are identified separately.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $7.742 billion | $7.301 billion | +6.0% |
| Operating income | $1.633 billion | $1.529 billion | +6.8% |
| Net income attributable to controlling interest | $819.5 million | $786.0 million | +4.3% |
| Diluted EPS | $2.58 | $2.49 | +3.6% |
| Operating cash flow | $1.635 billion | $1.664 billion | −1.7% |
| Cash and cash equivalents at year-end | $38.7 million | $43.4 million | −$4.7 million |
Fourth-quarter 2014 revenue was $1.881 billion, operating income $430.2 million, net income attributable to controlling interest $221.5 million and diluted EPS $0.69. For fourth-quarter 2013, the comparable figures were $1.778 billion, $360.6 million, $177.4 million and $0.56, respectively.
- Revenue mix and volumes: Higher energy-supply costs passed through regulated rate mechanisms were a major contributor to revenue growth and generally did not affect earnings. Retail electric sales volume fell 1.6%, partly because of cooler summer weather and conservation; firm natural-gas sales volume rose 6.0%, largely due to colder first-quarter weather and customer growth.
- Earnings drivers: Management attributed underlying improvement primarily to lower operations and maintenance costs, including labor and pension costs, and higher natural-gas sales. Offsetting factors included higher depreciation and property taxes, lower electric sales, and a $22.4 million after-tax 2014 charge for FERC transmission-return-on-equity matters. Reported 2014 earnings included $22.1 million of after-tax integration and merger-related costs; earnings excluding those costs were $841.6 million, or $2.65 per share, versus $799.8 million, or $2.53, in 2013.
- Debt and liquidity: NU reported $8.606 billion of long-term debt on its balance sheet, in addition to short-term borrowings; long-term debt represented 46% of total capitalization in the selected data. NU parent had about $1.1 billion outstanding under its commercial-paper program and $348.9 million of available borrowing capacity. NSTAR Electric had $302 million of commercial paper outstanding and $148 million of available capacity. NU’s current liabilities exceeded current assets by approximately $442 million. Management said operating cash flows and capital-market access should be sufficient to meet operating and forecast investment needs.
- Cash investment and dividends: Cash investments in property, plant and equipment were $1.604 billion; broader capital expenditures, including specified non-cash items, were approximately $1.7 billion. Common dividends paid were $475.2 million, compared with $462.7 million in 2013. The board approved a quarterly dividend of $0.4175 per share in February 2015, a 6.4% increase from the December 2014 payment.
- Balance sheet and obligations: Total assets were $29.778 billion and shareholders’ equity was $9.977 billion at year-end. The accrued pension, SERP and PBOP liability was $1.639 billion. NU said updated mortality assumptions and lower discount rates materially increased benefit obligations; management estimated 2015 pension contributions of about $155 million and PBOP contributions of about $27 million.
Material changes, outlook, risks and contingencies
- Outlook: Management projected 2015 EPS of $2.75–$2.90, excluding integration costs. Planned 2015–2018 capital expenditures total approximately $8.4 billion: about $4.2 billion for electric and gas distribution, $3.9 billion for transmission and $360 million for IT and facilities. The projection excludes Access Northeast.
- Major projects: Access Northeast, developed with Spectra Energy and National Grid, is expected to cost approximately $3 billion, subject to FERC approval, and have an anticipated November 2018 in-service date. NU, Spectra and National Grid announced respective ownership interests of 40%, 40% and 20%. Other transmission plans, including Northern Pass, remain subject to permitting, siting, cost and schedule risks.
- Regulation: FERC set the transmission base ROE at 10.57% for the first complaint period and prospectively from October 2014, and ordered customer refunds. NU recorded $60.7 million of cumulative pre-tax reserves for the first and second complaints; the company could not determine an amount for the third complaint. Management considered existing reserves appropriate, but the second and third complaints remained unresolved.
- New Hampshire generation: The NHPUC opened a proceeding to determine whether some or all of PSNH’s generation assets should be divested. The prudence review of PSNH’s Merrimack Station Clean Air Project was stayed in January 2015 for settlement discussions. Recovery of project costs remains subject to regulatory review; management said recovery was probable but could not predict the outcome.
- Storms and environmental matters: Major storm costs were generally deferred for recovery through rates. A November 2014 storm generated estimated deferred restoration costs of $23 million at PSNH and $3 million at WMECO. Environmental remediation liabilities were $43.3 million for 65 sites at year-end, including $38.8 million for former manufactured-gas-plant sites; estimates may increase as investigations progress. The proposed Merrimack Station water-discharge permit could require costly cooling-system changes; the filing cited an EPA estimate of approximately $112 million in net present-value installation and operating costs.
- Other contingencies and risks: The DOE spent-nuclear-fuel Phase III damages cases were scheduled for trial in 2015. A Massachusetts settlement, if approved, would require NSTAR Electric and NSTAR Gas to refund $44.7 million to customers; the filing described a potential after-tax benefit upon regulatory approval. Other prominent risks include regulatory cost recovery, severe weather, cyber and grid-security events, environmental requirements, capital-market access, pension assumptions and possible impairment of $3.5 billion of goodwill. The 2014 goodwill test found no impairment.
- Controls and reporting: Deloitte issued unqualified opinions on NU’s consolidated financial statements and internal control over financial reporting. Management reported effective controls at year-end, while noting implementation of a new general-ledger system in August 2014.
Most important facts for investors to verify
- Whether 2015 EPS guidance of $2.75–$2.90, excluding integration costs, was achieved, and how actual results reconcile to reported GAAP EPS.
- Developments and final refund exposure in the second and third FERC ROE complaints, including the adequacy of the recorded reserves.
- Rulings on PSNH generation divestiture and the Clean Air Project prudence review, including any effect on cost recovery or stranded costs.
- Funding and execution of the $8.4 billion capital plan, project approvals and budgets, and the ownership, financing and regulatory terms of Access Northeast.
- Liquidity and refinancing capacity, including commercial-paper balances, near-term maturities, covenant compliance and the effect of elevated capital spending and benefit-plan obligations.
- Whether storm restoration and environmental remediation costs remain recoverable, and whether the Massachusetts customer-refund settlement is approved and implemented.