Business context and reporting period
Northeast Utilities (NU), the parent of regulated electric and natural-gas utilities in Connecticut, Massachusetts, and New Hampshire, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The filing also presents separate results for CL&P, PSNH, and WMECO. NU’s proposed merger with NSTAR remained subject to outstanding approvals; management expected a fourth-quarter 2011 closing.
Financial performance and condition
Unless otherwise noted, dollar amounts are millions. NU’s second-quarter and first-half results compared with 2010 were:
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $1,047.5 | $1,111.4 | $2,282.7 | $2,450.8 |
| Operating income | $178.1 | $178.3 | $405.5 | $405.0 |
| Net income attributable to controlling interests | $77.3 | $71.9 | $191.4 | $158.2 |
| Diluted EPS | $0.44 | $0.41 | $1.08 | $0.90 |
| Operating margin (derived) | 17.0% | 16.0% | 17.8% | 16.5% |
NU declared dividends of $0.28 per share for Q2 and $0.55 per share for the first half, versus $0.26 and $0.51, respectively, in 2010. Excluding after-tax merger costs of $1.2 million for Q2 and $9.5 million year to date, management reported non-GAAP EPS of $0.44 and $1.13, respectively.
- Cash flow: Cash and cash equivalents were $15.1 at June 30, 2011, down from $23.4 at year-end 2010. Statement-of-cash-flows operating cash flow was $686.7 for the first half, versus $533.8 in 2010; management separately reported $652.4 net of rate-reduction-bond payments, versus $405.2. Cash capital expenditures were $468.5, compared with $442.4.
- Debt and liquidity: Balance-sheet long-term debt was $4,356.1, with $337.0 current; notes payable to banks were $137.0. NU reported total capitalization of $8,389.2. NU parent had $95 million drawn and $384.4 million available on its $500 million revolver; the utilities’ joint $400 million facility had $358 million available. NU was in compliance with debt covenants.
- Assets and investment: Total assets were $14,442.3, including net property, plant and equipment of $9,863.8. NU expected 2011 regulated-company capital expenditures of approximately $1.2 billion.
Material changes versus the prior comparable period
- First-half net income attributable to controlling interests rose about 21% and diluted EPS rose from $0.90 to $1.08. Management attributed improved earnings mainly to electric distribution rate decisions, colder-than-normal first-quarter weather, transmission investment, cost management, and absence of a 2010 Healthcare Act charge.
- Revenue declined 5.7% in Q2 and 6.9% year to date, while operating income was broadly flat. NU said lower pass-through energy and supply-related revenues and costs, including lower supply prices and customer migration to third-party suppliers, drove much of the reported revenue reduction; these tracked items generally did not affect earnings.
- Regulated-company earnings were $82.5 in Q2 and $205.4 for the first half, versus $69.0 and $157.1. Distribution earnings increased to $40.3 and $118.5; transmission earnings were $42.2 and $86.9.
- Retail electric sales were down 1.3% in Q2 but up 0.9% in the first half; firm natural-gas sales increased 22.2% and 18.4%, respectively. Management noted that weather, conservation, economic conditions, and distributed generation affect demand.
- Operating cash flow improved year over year, partly reflecting distribution rate increases, accelerated tax depreciation benefits, and no first-half payments for 2010 storm costs. Pension contributions and merger-related payments partly offset those benefits.
Outlook, commentary, risks, and unusual items
- 2011 EPS guidance: NU revised its forecast to GAAP diluted EPS of $2.10–$2.20, including projected after-tax merger costs of approximately $0.20 per share; excluding those costs, the range was $2.30–$2.40. Distribution EPS guidance increased to $1.30–$1.35; transmission remained $1.05–$1.10. Management projected operating cash flow of approximately $900–$950 million, net of rate-reduction-bond payments.
- Funding and investment: NU expected approximately $260 million of long-term debt issuance in the second half of 2011. It expected to contribute approximately $145 million to its pension plan in 2011, of which $19.2 million had been contributed by June 30. Additional pension contributions of about $390 million were expected over 2012–2015, subject to plan and market factors.
- Merger: The proposed tax-free stock exchange provides 1.312 NU shares per NSTAR share. Shareholders of both companies had approved the transaction; several federal and state approvals had been obtained, while Massachusetts DPU and Nuclear Regulatory Commission approvals remained outstanding. Connecticut jurisdiction decisions were under appeal. Management cited regulatory timing, integration, and potential credit-rating changes as risks. The filing estimated post-transaction net savings of approximately $780 million over the first 10 years, based on the companies’ submitted analysis.
- Projects and regulation: NU estimated total NEEWS project costs at approximately $1.35 billion after revised estimates and expected Northern Pass construction to begin in 2014 and finish in Q4 2016, subject to permits and route review. PSNH’s approximately $430 million Merrimack Clean Air Project was about 85% complete. Proposed federal air-toxics rules could affect PSNH generation facilities; review of impacts on some units was incomplete.
- Storms and contingencies: June storms caused significant outages and restoration costs; NU deferred or capitalized eligible costs for future recovery. A July 2011 Clean Air Act citizens’ suit alleged permitting violations at PSNH’s Merrimack station and sought injunctive relief, penalties, and costs; PSNH said it would defend the suit. NU also disclosed environmental remediation reserves, including a $2.6 million HWP site reserve, with potential additional costs not reasonably estimable.
- Other unusual items: CL&P sold transmission assets with a $42.5 million net book value for $46.8 million in proceeds including closing-cost reimbursement, and retained operating and maintenance responsibilities. A $122 million PSNH bond issuance at 4.05% was used to redeem tax-exempt bonds bearing 6% coupons.
- The interim financial statements were reviewed, not audited. Management reported disclosure controls as effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Progress and final regulatory approvals for the NSTAR merger, including the implications of pending proceedings and appeals.
- Whether 2011 EPS and cash-flow guidance is achieved, and the magnitude and timing of merger costs, pension contributions, and planned debt issuance.
- Rate-case outcomes and recovery of deferred storm, regulatory, and project costs, including the Yankee Gas reconsideration.
- Execution, permitting, budgets, and expected returns for NEEWS, Northern Pass, the Clean Air Project, and other major capital projects.
- Potential exposure from the Merrimack litigation, environmental remediation, credit-rating triggers, and counterparties’ ability to perform.