Eversource Energy (Northeast Utilities) — Q3 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2012. Northeast Utilities (NU), a regulated electric and natural-gas delivery company serving approximately 3.5 million customers, completed its merger with NSTAR on April 10, 2012. NU’s consolidated 2012 results include NSTAR only from the merger date, making reported comparisons with 2011 not like-for-like. Unless noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $1,861.5 | $1,114.9 | $4,589.8 | $3,397.6 |
| Operating income | $412.9 | $203.8 | $786.8 | $609.3 |
| Net income attributable to controlling interest | $207.6 | $90.0 | $351.2 | $281.4 |
| Diluted EPS | $0.66 | $0.51 | $1.32 | $1.58 |
| Operating margin (approx.) | 22.2% | 18.3% | 17.1% | 17.9% |
For the first nine months, cash provided by operations was $796.0 million on the cash flow statement; management separately cited $700.8 million after rate-reduction-bond payments. Cash used for investing was $1,061.3 million, including $1,081.8 million of cash capital expenditures. Financing provided $332.2 million, and cash ended the period at $73.4 million.
At September 30, current assets were $2.14 billion versus current liabilities of $3.80 billion, a working-capital deficit of about $1.66 billion. NU reported $1.36 billion of notes payable, $879.7 million of current maturities of long-term debt, and $6.73 billion of long-term debt; long-term debt including current maturities totaled about $7.61 billion. Management attributed the current-liability position partly to capital spending and the extended recovery of regulated investments, and expected operating cash flows and market access to meet funding needs. NU had $1.10 billion outstanding under its commercial-paper program, with $51.8 million available; NSTAR Electric had $261 million outstanding, with $189 million available. Total capitalization was $16.06 billion.
Changes versus the prior comparable period
- Q3 revenue and earnings rose substantially, driven chiefly by NSTAR’s inclusion and higher transmission earnings. NU reported NSTAR contributed $105 million of Q3 net income attributable to controlling interest. Higher transmission investment also supported results.
- Nine-month GAAP net income rose, but diluted EPS fell to $1.32 from $1.58, reflecting the issuance of approximately 136 million NU shares for the merger. Excluding merger and related settlement costs, management reported non-GAAP diluted EPS of $1.72 versus $1.64 and earnings of $456.7 million versus $291.5 million.
- First-nine-month operating cash flow declined from $888.4 million to $796.0 million on the cash flow statement. Management cited storm-cost payments, pension contributions, customer bill credits, merger transaction payments, and tax payments as key cash-flow pressures.
Outlook, commentary, risks and unusual items
- NU projected approximately $7 billion of capital expenditures for 2012–2015, including about $1.7 billion in 2012, and an additional $1.2 billion of transmission spending for 2016–2017. Major projects include transmission upgrades and the Greater Springfield Reliability Project.
- The merger’s preliminary purchase price was $5.04 billion, including $3.23 billion of preliminary goodwill. NU recorded $105.5 million of after-tax merger and related settlement costs for the first nine months, including transaction, compensation and customer-settlement items.
- Base distribution-rate freezes under merger settlement agreements extend through December 2014 for CL&P and through 2015 for NSTAR Electric, NSTAR Gas and WMECO. NU’s dividend was $0.34 per share in Q3; the board later approved $0.343 per share for payment on December 31, 2012.
- Hurricane Sandy struck after quarter-end, causing outages for an estimated 1.5 million of NU’s 3.1 million electric customers. Restoration costs were not yet estimable. Management expected costs to qualify for regulatory recovery and did not expect a material operating-results impact, but recovery remained subject to regulatory processes.
- Connecticut’s storm investigation could result in penalties, including a lower allowed return on equity or disallowance of storm costs; management could not estimate the impact. CL&P had $284.9 million of deferred costs for Tropical Storm Irene and the October 2011 snowstorm, net of a $40 million reserve.
- A FERC complaint seeks to reduce the transmission base ROE from 11.14%; complainants proposed 9%, while Massachusetts municipal utilities proposed 8.2%. Any change could be retroactive to October 1, 2011; a FERC decision was expected in 2014. Management estimated each 10-basis-point change would affect annual consolidated earnings by about $2.1 million.
- Other items include a $28 million pre-tax NSTAR Electric reserve for disputed recovery of energy-related bad-debt costs, and ongoing regulatory uncertainty over storm-cost and other cost recovery. The filing also reports DOE spent-fuel litigation judgments; any recovered proceeds are expected to benefit customers through lower charges.
Important facts for investors to verify
- Separate merger-driven growth from underlying performance, and review the share-count effect on EPS and management’s non-GAAP reconciliation.
- Track execution, funding and regulatory recovery for the announced capital program and major transmission projects.
- Monitor commercial-paper balances, upcoming debt maturities, refinancing access and cash flow after storm, pension and dividend needs.
- Follow regulatory outcomes on CL&P storm penalties and deferred costs, the FERC transmission ROE complaint, and NSTAR Electric’s bad-debt recovery reserve.
- Confirm the ultimate costs and recovery timetable for Hurricane Sandy restoration; the filing did not provide a clear cost estimate.