Eversource Energy (formerly Northeast Utilities) — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with the same 2014 period. Eversource is a regulated electric and natural gas delivery company serving approximately 3.6 million customers in Connecticut, Massachusetts, and New Hampshire. The filing is also made by four utility subsidiaries. The company changed its name from Northeast Utilities to Eversource Energy on April 29, 2015.
Key financial metrics
| Eversource consolidated | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $2.513 billion | $2.291 billion | +9.7% |
| Operating income | $497.5 million | $467.7 million | +6.4% |
| Net income attributable to controlling interest | $253.3 million | $236.0 million | +7.3% |
| Diluted EPS | $0.80 | $0.74 | +8.1% |
| Operating cash flow | $481.8 million | $493.8 million | -$12.0 million |
| Capital investment in property, plant and equipment | $362.6 million | $348.7 million | +$13.9 million |
Operating margin was approximately 19.8%, versus 20.4% a year earlier; net margin was approximately 10.1%, versus 10.3%. Common dividends declared were $0.42 per share, up from $0.39.
At March 31, cash and cash equivalents were $71.0 million; current assets were $2.793 billion and current liabilities $3.112 billion (current ratio approximately 0.90). Long-term debt was $8.602 billion, with $245.6 million current maturities and $1.004 billion of notes payable. Eversource parent had $788 million of commercial paper outstanding and $662 million of unused capacity under its $1.45 billion facility. NSTAR Electric had $215.5 million outstanding and $234.5 million of unused capacity under its $450 million facility. Operating cash flow exceeded capital investment by $119.2 million before dividends and other financing flows.
Material changes versus the prior comparable period
- Consolidated revenue increased 9.7%, driven largely by colder weather, higher rates, and higher energy-supply costs passed through to customers. The revenue increase therefore does not translate proportionately into earnings.
- Electric distribution earnings rose to $130.6 million from $112.2 million; natural gas distribution earnings rose to $55.6 million from $52.1 million. Transmission earnings fell to $66.6 million from $74.9 million, principally reflecting the FERC return-on-equity reserve and lower allowed returns.
- Retail electric sales volumes increased 0.7%; firm natural gas sales volumes increased 7.8%. Management attributed much of the increase to colder weather. Weather-normalized gas volumes rose 3.2%.
- Operating cash flow declined modestly, mainly due to timing of regulatory recoveries and working capital. A roughly $250 million income-tax refund in Q1 2015 partly offset those pressures.
Outlook, management commentary, risks and unusual items
- Management reported GAAP earnings of $253.3 million, or $0.80 per share. Excluding after-tax merger-integration costs, non-GAAP earnings were $257.3 million, or $0.81 per share, compared with $241.8 million, or $0.76, in Q1 2014. This non-GAAP measure is not a substitute for GAAP results.
- First-quarter results included a $12.4 million after-tax charge related to the FERC transmission ROE order. NSTAR Electric recorded a $14.5 million after-tax benefit from the basic-service bad-debt ruling and a $13 million after-tax benefit from the Massachusetts settlement. Management cited these and the CL&P rate increase as major contributors to improved earnings.
- NSTAR Electric expected to seek recovery of approximately $43 million of supply-related bad-debt costs in Q2 2015. The DPU had ordered reconciliation with the Massachusetts Attorney General; recovery was not assured by the filing.
- PSNH agreed in principle to pursue divestiture of its generation assets. The plan contemplated securitizing remaining stranded costs through a non-bypassable customer charge, forgoing $25 million of deferred Clean Air Project equity return, a $5 million non-customer-recoverable clean-energy contribution, and no general distribution rate increase effective before July 1, 2017. Implementation depended on state legislation, a final settlement, and NHPUC approval; management expected legislation in Q3 2015 and a commission decision late in 2015.
- Major capital projects included Access Northeast, an approximately $3 billion pipeline expansion targeted for November 2018; Northern Pass, estimated at $1.4 billion and then expected in service in the first half of 2019, subject to permitting; and the Greater Boston/New Hampshire transmission solution, with Eversource investment estimated at $489 million. These estimates and schedules are subject to approvals and execution risks.
- Other identified risks include regulatory decisions and rate recovery, FERC transmission competition and potential project delays, weather, energy costs, access to capital and interest rates, cyber and grid disruptions, environmental remediation, and customer demand. Eversource reported environmental reserves of $43.6 million for 65 sites. Management said no material changes to previously disclosed risk factors or contractual obligations were identified.
- No formal full-year earnings guidance is provided in the supplied filing text. The company declared a $0.4175-per-share dividend payable June 30, 2015, and reported an April 2015 S&P upgrade with stable outlooks.
Important facts for investors to verify
- How much of earnings growth is repeatable after the unusual regulatory benefits and charges, and what final outcomes result from the bad-debt recovery filing and customer-refund settlement?
- Whether New Hampshire legislation, final settlement terms, and NHPUC approval allow PSNH generation divestiture and stranded-cost securitization to proceed as planned.
- Whether the FERC ROE decisions, including the 11.74% cap on total transmission ROE, affect future transmission returns, refunds, or investment economics.
- Whether operating cash flow, short-term borrowing capacity, and capital spending remain adequate given current liabilities exceeding current assets and the company’s substantial investment program.
- Progress, permitting, cost estimates, and in-service schedules for Northern Pass, Access Northeast, and major transmission projects.