EVERSOURCE ENERGY (NORTHEAST UTILITIES) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are with December 31, 2010. This combined filing covers Northeast Utilities (NU) and subsidiaries, including CL&P, PSNH and WMECO. NU’s interim financial statements were reviewed, not audited. Amounts below are in U.S. dollars; “$ million” is used for readability.
Financial results and key metrics
| NU consolidated | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $1,235.3 million | $1,339.4 million | -7.8% |
| Operating income | $227.4 million | $226.7 million | +0.3% |
| Net income attributable to controlling interests | $114.2 million | $86.2 million | +32.4% |
| Diluted EPS | $0.64 | $0.49 | +$0.15 |
| Operating margin | 18.4% | 16.9% | +1.5 percentage points |
| Cash and cash equivalents, March 31 | $15.4 million | $30.0 million at March 31, 2010 | — |
Management reported Q1 earnings excluding $8.3 million of after-tax merger costs of $122.5 million, or $0.69 per share. This is a non-GAAP measure; reported GAAP earnings were $114.2 million, or $0.64 per share.
- Cash flow: GAAP net cash from operating activities was $372.8 million, versus $225.7 million. Management’s liquidity discussion reports operating cash flow net of rate reduction bond (RRB) payments of $355.9 million, versus $159.1 million.
- Capital spending: Cash capital expenditures were $236.7 million, up from $202.5 million. Management forecast approximately $1.2 billion of 2011 regulated-company capital expenditures.
- Debt and liquidity: At March 31, NU reported $4.63 billion of long-term debt, $66.3 million current portion, $189.0 million of bank notes payable and $164.7 million of RRBs. NU parent had $149 million drawn on its $500 million revolver, with $324.9 million available; the utilities’ joint $400 million revolver had $360 million available. Cash was $15.4 million.
- Margins: Operating margin increased to 18.4% from 16.9%; net income attributable to controlling interests as a share of revenue was 9.2%, compared with 6.4%.
- Dividend: Q1 declared dividend was $0.28 per share, compared with $0.26. The board declared $0.275 per share for payment in June 2011.
Material changes and management explanation
- Revenue fell 7.8%, chiefly because lower energy and supply costs reduced pass-through electric distribution revenues. These tracking-mechanism revenues and related expenses generally do not affect earnings. Natural gas distribution and transmission revenues increased.
- Profitability improved primarily due to electric distribution rate increases, colder-than-normal weather, higher transmission earnings, increased firm natural gas sales, and the absence of a Q1 2010 charge related to the 2010 Healthcare Act. Higher pension and property-tax costs partly offset these effects.
- Retail electric sales increased 3.0% and firm natural gas sales increased 16.9%; on a weather-normalized basis, combined electric sales declined 0.2% and firm gas sales rose 3.2%. Management cited weak economic conditions and customer conservation as factors.
- NU’s total assets were $14.42 billion at quarter-end, versus $14.47 billion at year-end 2010. Long-term debt was broadly unchanged; common shareholders’ equity rose to $3.89 billion from $3.81 billion.
Outlook, significant items and risks
- 2011 EPS guidance affirmed: GAAP diluted EPS of $2.05–$2.20, including projected after-tax merger costs of $0.20 per share; non-GAAP EPS excluding those costs of $2.25–$2.40. Guidance assumes stand-alone operations and includes an anticipated reasonable outcome in the Yankee Gas rate case.
- Cash-flow outlook: NU projected 2011 operating cash flow of approximately $900–$950 million, net of RRB payments, down from its earlier range. Management cited a lower expected cash benefit from accelerated depreciation under the 2010 Tax Act: approximately $200 million rather than $250 million.
- NSTAR merger: Shareholders of both companies approved the proposed merger on March 4, 2011. The exchange ratio is 1.312 NU shares per NSTAR share; NU anticipated issuing about 137 million shares. Completion remained subject to regulatory approvals, with closing expected in the second half of 2011. Regulatory review, approval conditions, integration, management distraction and potential rating changes were identified risks. Merger-related shareholder lawsuits had been dismissed.
- Capital projects: The $795 million Greater Springfield Reliability Project was expected to enter service in late 2013; a Connecticut route appeal was pending. PSNH’s Clean Air Project was estimated at $430 million, about 82% complete, and expected to finish by mid-2012. Northern Pass was estimated at approximately $1.1 billion combined project cost; permits, siting and possible New Hampshire limits on eminent domain posed uncertainties.
- Funding and pension: NU expected to contribute approximately $145 million to its pension plan during 2011, in quarterly installments beginning in April. PSNH and WMECO had entered into interest-rate hedges associated with planned debt issuance; further debt issuance and PCRB refinancing were planned.
- Regulatory and environmental exposure: A Yankee Gas rate decision was expected in June 2011. The EPA had proposed new hazardous-air-pollutant requirements for fossil-fuel generators; review of potential effects on PSNH units other than Merrimack was incomplete. NU disclosed environmental remediation reserves, including a $2.8 million HWP site reserve, with potential additional costs not reasonably estimable.
- Other risks: Results remain exposed to regulatory actions, weather, economic and demand conditions, capital-market access, interest rates, commodity and counterparty risks, legal matters and project timing. Management said it had identified no material changes to previously disclosed risk factors or market-risk assessments.
Most important facts for investors to verify
- Whether the NSTAR merger received all required approvals, closed on the expected timetable, and produced the anticipated costs, share issuance and dividend outcome.
- Whether reported earnings growth is sustained after excluding merger charges and considering weather, rate-case effects and pass-through revenues and costs.
- Whether NU delivered its 2011 GAAP and non-GAAP EPS guidance and $900–$950 million operating-cash-flow outlook, including the actual tax-related cash benefit.
- Actual capital spending, project schedules and recovery mechanisms for major transmission, generation and gas projects, including regulatory, siting and cost risks.
- Debt issuance, revolver availability, required pension contributions, credit ratings and any collateral needs following a downgrade.
- Final regulatory and environmental outcomes, including the Yankee Gas rate case, proposed EPA requirements, remediation exposure and the outstanding Northern Pass permitting and land-acquisition issues.