Eversource Energy — 2017 Form 10-K
Business context and reporting period. This combined Form 10-K reports the fiscal year ended December 31, 2017; it is an annual filing, not a quarterly report. Eversource is a regulated utility holding company serving about 4 million electric, natural-gas and water customers across Connecticut, Massachusetts and New Hampshire. Its principal businesses are electric distribution and transmission and natural-gas distribution. The filing also covers wholly owned subsidiaries CL&P, NSTAR Electric and PSNH.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenue | $7.752 billion | $7.639 billion |
| Operating income | $1.918 billion | $1.860 billion |
| Operating margin | 24.7% | 24.3% |
| Net income attributable to common shareholders | $988.0 million | $942.3 million |
| Diluted EPS | $3.11 | $2.96 |
| Cash provided by operating activities | $2.005 billion | $2.175 billion |
| Cash investment in property, plant and equipment | $2.348 billion | $1.977 billion |
| Cash and cash equivalents at year-end | $38.2 million | $30.3 million |
| Long-term debt, including current portion | $12.326 billion | $9.603 billion |
Revenue rose 1.5%, common earnings increased 4.8%, and diluted EPS increased 5.1%. Operating cash flow fell about 8%, reflecting, among other items, tax-payment timing, higher pension and PBOP contributions, and the absence of prior-year nuclear-fuel litigation proceeds. Reported debt excludes $1.088 billion of notes payable shown separately at year-end 2017. Current liabilities exceeded current assets by approximately $1.1 billion. Management cites operating cash flows and capital-market access as sources to meet obligations and planned investment.
Segment earnings attributable to common shareholders were $497.4 million for electric distribution, $391.9 million for electric transmission, and $74.6 million for natural-gas distribution. Transmission earnings benefited from a higher rate base; natural-gas earnings declined year over year. Fourth-quarter 2017 revenue was $1.896 billion, net income attributable to common shareholders was $237.4 million, and diluted EPS was $0.75.
Material changes versus 2016
- Eversource acquired Aquarion, a regulated water utility, on December 4, 2017 for approximately $1.675 billion, including about $880 million in cash and $795 million of assumed debt. Aquarion contributed $15.9 million of revenue and $1.1 million of pretax income in 2017 after acquisition.
- Western Massachusetts Electric Company merged into NSTAR Electric on December 31, 2017; prior periods were retrospectively adjusted for comparability.
- Electric-transmission revenue increased with investment in the transmission rate base. Electric retail sales volume declined 2.6%, primarily amid mild summer weather and conservation; firm natural-gas sales volume rose 3.0%, helped by colder fourth-quarter weather.
- 2017 cash capital investment increased to $2.348 billion. Year-end long-term debt, including current maturities, increased to $12.326 billion.
- The 2017 NSTAR Electric rate decision produced a $44.1 million pretax benefit. That benefit is an unusual item to consider when assessing recurring performance.
Outlook, commentary and risks
- Guidance and investment: Management projected 2018 EPS of $3.20–$3.30 and approximately $10.8 billion of capital expenditures for 2018–2021, excluding potential Bay State Wind investment. The Board approved a quarterly dividend of $0.505 per share in February 2018.
- Tax legislation and rates: The December 2017 Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%. Eversource recorded provisional regulated excess deferred-tax liabilities of approximately $2.9 billion that management expects to benefit customers over time; final amounts and timing remain subject to regulatory review. NSTAR Electric’s approved $37 million annual rate increase was subsequently subject to a tax-related filing that would produce a net annual rate decrease of $19 million if accepted. A CL&P rate-case settlement was pending PURA approval.
- Generation divestiture: PSNH sold its thermal generation assets on January 10, 2018, with net proceeds of $134.1 million. Sale of hydroelectric assets was targeted for the first quarter of 2018. The NHPUC approved up to $690 million of rate-reduction bonds for stranded-cost recovery, subject to audit and appeal.
- Northern Pass: Although selected in Massachusetts’s clean-energy procurement, the project’s New Hampshire siting application was denied on February 1, 2018. Eversource intended to seek reconsideration. Approximately $277 million of project costs were capitalized at year-end; management warned that an impairment, if required, could materially harm results and cash flows.
- Regulatory and legal exposure: Four FERC complaints challenge transmission return-on-equity levels. Eversource carried a $39.1 million pretax reserve for the second complaint period; management could not estimate the ultimate outcome. The filing also reports $54.9 million of environmental remediation reserves for 59 sites, and potential additional costs beyond recorded reserves.
- Other risks: Key exposures include regulatory cost recovery and allowed returns, project approvals and delays, severe weather and system reliability, cybersecurity, financing access and interest rates, pension assumptions, environmental requirements, and water-supply or dam incidents. S&P upgraded Eversource and subsidiaries to A+ with stable outlook in December 2017. The company reported covenant compliance; the debt-to-capitalization covenant limit is 65%.
Important facts for investors to verify
- Whether Northern Pass can secure siting approval and retain its Massachusetts conditional selection, and whether any capitalized costs require impairment.
- Final regulatory treatment and timing of customer benefits from the estimated $2.9 billion of excess deferred-tax liabilities.
- Completion and final economics of PSNH’s hydroelectric sale and stranded-cost recovery, including the proposed rate-reduction bonds.
- Resolution of FERC transmission ROE complaints and any resulting refunds or changes to transmission earnings.
- Recurring earnings and cash-flow performance after the NSTAR Electric rate-case benefit, Aquarion acquisition effects, and other timing-related items; also monitor debt, refinancing needs and the substantial 2018–2021 capital program.
Audit and controls: Deloitte issued an unqualified opinion on Eversource’s consolidated financial statements and internal controls. Management excluded Aquarion from its year-end internal-control assessment because it was acquired late in 2017.