Eversource Energy — Q3 2018 Form 10-Q Summary
Business context and reporting period
Unaudited combined quarterly report for Eversource Energy and subsidiaries, including The Connecticut Light and Power Company (CL&P), NSTAR Electric and Public Service Company of New Hampshire (PSNH). The quarter ended September 30, 2018; comparisons are with the three and nine months ended September 30, 2017. Eversource provides regulated electric, natural gas and water services in Connecticut, Massachusetts and New Hampshire.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenues | $2.271 billion | $1.989 billion | $6.413 billion | $5.856 billion |
| Operating income | $466.0 million | $495.3 million | $1.300 billion | $1.444 billion |
| Net income attributable to common shareholders | $289.4 million | $260.4 million | $801.7 million | $750.6 million |
| Diluted EPS | $0.91 | $0.82 | $2.52 | $2.36 |
| Dividends declared per common share | $0.51 | $0.48 | $1.52 | $1.43 |
Operating margin was approximately 20.5% in Q3 2018 versus 24.9% a year earlier, and 20.3% for the first nine months versus 24.7%. Net margin was approximately 12.8% and 12.5%, respectively, compared with 13.1% and 12.9% in the comparable periods.
- Cash provided by operating activities for the first nine months was $1.408 billion, down from $1.476 billion. Cash capital investment was $1.885 billion, up from $1.642 billion; reported capital expenditures including specified noncash items were $1.96 billion.
- Cash and cash equivalents were $59.1 million at September 30, 2018, versus $38.2 million at December 31, 2017. Cash, cash equivalents and restricted cash in the cash-flow statement totaled $134.6 million.
- At September 30, debt-like obligations totaled approximately $14.2 billion, including notes payable, current and long-term debt, and rate reduction bonds, compared with approximately $13.4 billion at year-end 2017. Eversource parent and NSTAR Electric had $623.3 million and $409.5 million, respectively, of available commercial-paper capacity; neither revolving-credit facility had borrowings outstanding.
- Common shareholders’ equity was $11.409 billion at September 30, 2018, versus $11.086 billion at December 31, 2017.
Material changes versus the prior comparable period
- Revenue increased 14.2% in Q3 and 9.5% year to date, while operating income declined 5.9% and 10.0%, respectively. Net income attributable to common shareholders rose 11.1% in Q3 and 6.8% year to date, helped by lower income tax expense.
- Revenue growth includes the contribution of Aquarion, acquired in December 2017, and higher pass-through energy and transmission costs. Changes in revenue presentation under the new revenue standard also increased reported gross electric distribution revenues and related eliminations; the filing says this presentation change did not materially affect results. Revenue growth should therefore not be read as equivalent growth in underlying earnings.
- Operating expenses grew faster than revenue, notably purchased power, fuel and transmission, depreciation and amortization. These increases were partly offset by lower energy-efficiency expense year to date and lower income taxes.
- Operating cash flow declined year to date, principally reflecting storm-restoration payments, higher income-tax payments and working-capital timing. Capital investment increased.
- Electric transmission earnings increased to $329.6 million for nine months from $289.6 million, primarily on a higher transmission rate base. Electric distribution earnings fell to $379.3 million from $393.4 million, mainly because PSNH sold its generation assets. Natural gas distribution earned $50.2 million versus $49.1 million; water distribution contributed $26.3 million, reflecting Aquarion’s acquisition.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific consolidated earnings or EPS guidance. Management believes operating cash flows, borrowing availability and access to debt markets will be sufficient for working capital, operations and planned capital investment. Results for the nine-month period are not necessarily indicative of full-year results.
- Tax and customer rates: The federal corporate tax rate reduction from 35% to 21% lowered tax expense, and an $18 million aggregate benefit from tax-return adjustments and Connecticut tax-law changes was recorded in Q3. The company expects regulated tax benefits and excess deferred tax liabilities to benefit customers through regulatory rate mechanisms; approximately $2.9 billion of excess ADIT was recorded as a regulatory liability.
- Access Northeast: Eversource recorded a $32.9 million pretax ($26 million after-tax) impairment, writing off its full carrying value in the project. Management cited uncertainty over Massachusetts legislation and project timing after September’s natural-gas-related events in eastern Massachusetts.
- Northern Pass: The New Hampshire siting application was denied and the Massachusetts selection and contract negotiations were terminated. The New Hampshire Supreme Court accepted the company’s appeal in October 2018. Approximately $302 million of project costs remained capitalized; a future adverse recoverability assessment could impair most of that amount, with a potentially material adverse effect.
- PSNH generation divestiture and securitization: PSNH completed sales of its thermal and hydroelectric generation assets in 2018; hydro proceeds were $77.3 million and generated a $17.2 million gain. PSNH Funding issued $635.7 million of non-recourse rate reduction bonds, backed by customer charges, to finance stranded costs. The bonds carry a weighted-average interest rate of 3.66% and are expected to be repaid by February 2033.
- Regulatory and storm matters: FERC’s transmission return-on-equity complaints remain unresolved; Eversource recorded a $39.1 million pretax reserve for the second complaint period and said outcomes cannot yet be reasonably estimated. A 10-basis-point change in base ROE for each 15-month complaint period would affect after-tax earnings by about $3 million. PSNH received approval to recover $49 million of earlier storm costs and recognized $8.7 million of pretax carrying-charge income. 2018 storms generated approximately $266 million of deferred restoration costs, which management believes are recoverable from customers.
- Other risks: Environmental remediation reserves were $66.6 million at September 30. The filing also identifies risks including severe weather, regulatory decisions, capital-market access, cyber and physical security, project execution, and customer demand and collections.
Important facts for investors to verify
- How much of the revenue increase reflects Aquarion, pass-through costs and reporting changes versus sustainable growth in earnings.
- Whether storm-restoration costs and tax-related benefits are approved, recovered or refunded through future rates as expected.
- The eventual FERC ROE decisions, potential refunds and adequacy of the $39.1 million reserve.
- The status and recoverability of the $302 million Northern Pass investment and the commercial prospects for Access Northeast following its full impairment.
- How increased capital investment, debt obligations and commercial-paper borrowing affect liquidity, financing costs and future cash generation.