Eversource Energy (formerly Northeast Utilities) — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 27, 2013. This is an annual report, not a standalone fourth-quarter filing. The company completed its merger with NSTAR on April 10, 2012, so 2012 consolidated results include NSTAR only from that date.
Business context and financial results
Northeast Utilities was a regulated electric and natural-gas utility holding company serving customers in Connecticut, Massachusetts and New Hampshire. Its regulated businesses include electric distribution, transmission, natural-gas distribution and, principally in New Hampshire, generation.
| NU consolidated metric | 2012 | 2011 |
|---|---|---|
| Operating revenue | $6.274 billion | $4.466 billion |
| Operating income | $1.118 billion | $794.2 million |
| Net income attributable to controlling interest | $525.9 million | $394.7 million |
| Diluted EPS | $1.89 | $2.22 |
| Adjusted/non-GAAP earnings and diluted EPS | $633.5 million; $2.28 | $423.9 million; $2.38 |
| Operating cash flow | $1.161 billion reported; $1.05 billion net of rate-reduction-bond payments per MD&A | $970.4 million reported; $901.1 million net of those payments per MD&A |
| Cash capital expenditures | $1.472 billion | $1.077 billion |
| Cash and cash equivalents at year-end | $45.7 million | $6.6 million |
Reported revenue rose 40.5%, largely because of the merger and the resulting inclusion of NSTAR. Operating margin was approximately 17.8% in both years. Reported diluted EPS fell, while non-GAAP EPS also declined, reflecting the larger share count after issuing approximately 136 million shares for the merger and other costs. Management attributes underlying earnings improvement primarily to NSTAR’s contribution and higher transmission earnings.
Fourth-quarter 2012 revenue was $1.684 billion and net income attributable to controlling interest was $174.7 million, or $0.55 diluted EPS, compared with $1.068 billion, $113.2 million and $0.64, respectively, in fourth-quarter 2011. The comparison is materially affected by the merger.
Liquidity, debt and capital
- At December 31, 2012, NU had $7.200 billion of long-term debt, $763.3 million of current long-term debt and $1.120 billion of notes payable. Total equity was $9.237 billion; long-term debt represented 46% of capitalization.
- Current liabilities exceeded current assets by approximately $1.4 billion. Management cited short-term borrowings, near-term maturities and the lag between capital spending and regulatory recovery, and expected operating cash flow and capital-market access to fund requirements.
- Approximately $730 million of long-term debt was due within 12 months. NU had $1.15 billion outstanding under its commercial-paper program, backed by a five-year revolving facility; NSTAR Electric had $276 million outstanding under its $450 million commercial-paper program.
- NU paid $375 million in common dividends in 2012. The quarterly dividend was increased to $0.3675 per share for payment in March 2013.
- Management projected approximately $5 billion of capital expenditures for 2013–2015, including about $2.3 billion for transmission; an additional $1.6 billion of transmission investment was projected for 2016–2017.
Material changes and unusual items
- NSTAR merger: The $5.0 billion stock-for-stock transaction substantially expanded assets, revenue and debt. NU recorded $3.2 billion of acquired goodwill; total goodwill was $3.5 billion at year-end. The annual goodwill impairment test found no impairment.
- Merger and settlement costs: 2012 after-tax merger-related costs were $107.6 million, including transaction and integration expenses, customer bill credits and settlement commitments. The non-GAAP results exclude these costs; they are not GAAP earnings.
- Storm restoration: Deferred restoration costs from Tropical Storm Irene, the October 2011 snowstorm and Hurricane Sandy totaled $570.2 million in the storm-by-utility schedule. A separate NU regulatory-asset disclosure reports $547.7 million of storm costs; some PSNH costs were recorded in other long-term assets. Recovery remains subject to regulatory review. CL&P agreed to forgo recovery of $40 million of 2011 storm costs.
- Customer and operating trends: Weather-normalized combined electric sales declined 0.2%; reported consolidated sales increases largely reflect the acquired NSTAR businesses. Warmer-than-normal winter weather reduced electric and gas sales at several utilities. Management also cited conservation and distributed generation.
- Pension costs: Pension and postretirement expense increased. NU contributed approximately $222 million to the NUSCO pension plan in 2012 and expected combined pension-plan contributions of about $285 million in 2013; separate plan disclosures describe expected contributions of approximately $203 million and $82 million.
Outlook, risks and contingencies
- Transmission returns: Parties challenged the 11.14% base transmission ROE. Recommendations in the proceeding ranged from 8.2% to 9.66%; a FERC decision was expected in 2014. Any reduction could require customer refunds retroactive to October 1, 2011. Management estimated each 10-basis-point change could alter annual consolidated earnings by about $2.1 million.
- PSNH Clean Air Project: The Merrimack scrubber project cost approximately $421 million. Recovery is subject to a New Hampshire prudence review, despite temporary rates being authorized. Competitors and environmental groups also challenged cost recovery. A proposed cooling-system requirement for Merrimack had an EPA-estimated net present cost of approximately $112 million; the final permit was unresolved.
- Storm penalties and recovery: Massachusetts regulators assessed penalties of $4.1 million against NSTAR Electric and $2 million against WMECO for prior storm responses; appeals were pending and the charges were recorded. Connecticut regulators found CL&P deficient in its response to the 2011 storms and could impose penalties or disallow costs. A February 2013 blizzard was estimated to cost $100–$120 million, with management expecting recovery through regulatory processes.
- Other exposures: Recorded environmental remediation liabilities were $39.4 million for 77 sites, primarily former manufactured-gas sites. Pension funding, regulatory decisions, severe weather, merger integration, capital-market access, cyber and grid risks, and environmental regulation could affect results or cash flow.
- Near-term cash-flow factors: Management expected accelerated-depreciation tax provisions to provide $200–$250 million of cash-flow benefits in 2013–2014. The company also forecast substantial investment and reported leverage covenants requiring debt-to-total-capitalization of no more than 65%; it said the companies were in compliance.
Most important facts for investors to verify
- Separate recurring operating performance from merger-related charges, settlement costs and the partial-year consolidation of NSTAR; reconcile GAAP EPS with management’s non-GAAP presentation.
- Confirm the amount and timing of storm-cost recovery, including the difference between the $570.2 million storm schedule and the $547.7 million regulatory-asset figure, and track regulatory penalties and appeals.
- Monitor the FERC transmission ROE proceeding, potential retroactive refunds and the financial effect of any final rate determination.
- Track PSNH’s Clean Air Project prudence review and the outcome of the proposed Merrimack cooling-system permit requirements.
- Assess refinancing and liquidity needs, including the $730 million near-term debt maturities, commercial-paper balances, working-capital deficit and planned capital spending.
- Consider the scope limitation in NU’s internal-control assessment: management excluded acquired NSTAR LLC from its assessment for 2012, although the acquired business was included in consolidated financial statements.