Northeast Utilities (now Eversource Energy) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; financial statements are unaudited. The filing covers Northeast Utilities (NU) and its regulated utility subsidiaries, including CL&P, NSTAR Electric, PSNH and WMECO. NU served approximately 3.6 million electric and natural gas customers in Connecticut, Massachusetts and New Hampshire.
Key financial results
Amounts below are in millions of dollars, except per-share data. Comparative periods are Q2 and first half of 2013.
| NU consolidated metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $1,677.6 | $1,635.9 | $3,968.2 | $3,630.9 |
| Operating income | $294.0 | $350.6 | $761.7 | $769.5 |
| Net income attributable to controlling interest | $127.4 | $171.0 | $363.3 | $399.1 |
| Diluted EPS | $0.40 | $0.54 | $1.15 | $1.26 |
| Operating margin, approximately | 17.5% | 21.4% | 19.2% | 21.2% |
- Revenue increased 2.5% in Q2 and 9.3% in the first half, largely reflecting higher energy supply costs passed through to customers and, year to date, colder winter weather and higher sales. Those pass-through costs generally do not affect earnings.
- NU reported non-GAAP earnings excluding merger integration costs of $131.9 million, or $0.42 per share, in Q2 and $373.7 million, or $1.18 per share, for the first half. These measures are not substitutes for GAAP results.
- Cash from operations was $896.7 million for the first half, versus $769.0 million a year earlier. Capital investment in property, plant and equipment was $724.0 million, versus $700.3 million. Cash and cash equivalents were $34.1 million at June 30, down from $43.4 million at year-end 2013.
- At June 30, NU had $8.543 billion of long-term debt, including current maturities, and $905 million of notes payable. Current liabilities exceeded current assets by approximately $730 million. NU had $710.5 million outstanding under its commercial-paper program, with $739.5 million of stated remaining capacity. Management said operating cash flows and access to capital markets should be sufficient for expected requirements.
- Common dividends declared were $0.39 per share in Q2 and $0.79 per share for the first half. The board approved a $0.3925-per-share dividend paid June 30.
Material changes and operating drivers
- GAAP controlling-interest earnings fell 25.5% in Q2 and 9.0% for the first half. The principal factor was a $32.1 million after-tax reserve recorded in Q2 following FERC orders on transmission return-on-equity complaints. Higher depreciation and property taxes and lower Q2 retail electric sales also weighed on results.
- Transmission segment earnings were $43.9 million in Q2 and $118.8 million for the first half, down from $76.8 million and $156.7 million, respectively; the FERC reserve was the main cause. Electric distribution earnings were $83.4 million in Q2 and $195.6 million year to date. Natural gas distribution earnings were $2.0 million and $54.1 million, respectively.
- Q2 retail electric sales declined 2.9%, attributed mainly to milder late-May and June weather and conservation. First-half electric sales rose 0.7%, while firm natural gas sales rose 12.3%, mainly reflecting colder first-quarter weather and customer growth.
- Operating cash flow benefited from approximately $125.7 million of DOE spent-nuclear-fuel litigation proceeds, the absence of major storm-restoration cash payments, and lower pension contributions. The DOE proceeds were returned for customers’ benefit; they should not be treated as recurring operating cash generation.
Outlook, regulatory matters and risks
- No consolidated earnings guidance is stated in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results and that utility demand is seasonal and weather-sensitive.
- FERC set a tentative transmission base ROE of 10.57% in one complaint proceeding and sent a second complaint to settlement or trial. NU’s cumulative pre-tax reserves for the proceedings were $79.3 million at June 30. Rehearing requests and an additional complaint were pending; the ultimate outcome and any further customer refunds remained uncertain.
- CL&P requested a distribution-rate increase, including a $116.7 million base-rate increase, storm-cost recovery and resiliency costs. The requested total increase was $231.5 million, with a decision expected in December 2014. PURA approved recovery of $365 million of storm costs, but directed $65.4 million of DOE proceeds to offset that amount.
- New Hampshire regulators and lawmakers were evaluating potential divestiture of PSNH generation assets. A consultant estimated fair value of $225 million against stated net book value of $660 million; NU maintained that related costs and investments were recoverable. The process could affect PSNH’s generation business and stranded-cost recovery.
- Other matters include environmental remediation reserves of $34.5 million at NU, ongoing DOE spent-fuel litigation, and regulatory recovery assumptions embedded in substantial regulatory assets. Management identified weather, regulation, demand, capital-market access, interest rates, bad debts, storms, cybersecurity and grid disruptions as risks.
- Capital projects include transmission reliability work and the proposed $1.4 billion Northern Pass project, which remained subject to permitting; the company expected operation in the second half of 2017. No assurance of project timing or approval was provided.
Important facts for investors to verify
- Progress and final financial impact of the FERC ROE cases, including the $79.3 million cumulative pre-tax reserve and possible refunds.
- Outcome and timing of CL&P’s rate case and the recoverability and collection schedule for storm-restoration costs.
- PSNH generation divestiture proceedings, asset valuation and treatment of any stranded costs.
- Recurring cash generation after excluding DOE litigation proceeds and other working-capital or timing benefits; compare capital spending, debt maturities and dividend requirements.
- Permitting, cost and schedule developments for Northern Pass and other major transmission investments, plus continued recovery of regulatory assets.