Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2012, for EverSource Energy (operating as Northeast Utilities or NU) and its subsidiaries, including The Connecticut Light and Power Company (CL&P), NSTAR Electric Company, Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The reporting period is significantly impacted by the merger with NSTAR, which was consummated on April 10, 2012. Consequently, consolidated results for the three and six months ended June 30, 2012, include NSTAR operations only from the merger date forward.
Key Financial Metrics (Six Months Ended June 30, 2012)
| Metric | 2012 (6 Months) | 2011 (6 Months) |
|---|---|---|
| Operating Revenues | $2,728.3 million | $2,282.7 million |
| Operating Income | $373.9 million | $405.5 million |
| Net Income (GAAP) | $147.0 million | $194.3 million |
| Net Income Attributable to Controlling Interest | $143.6 million | $191.4 million |
| Diluted EPS | $0.60 | $1.08 |
| Cash Flows from Operating Activities | $320.4 million | $686.7 million |
| Cash Capital Expenditures | $690.4 million | $468.5 million |
| Total Assets | $27.5 billion | $15.6 billion |
| Long-Term Debt | $6.9 billion | $4.6 billion |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 19.5% year-over-year, primarily driven by the inclusion of NSTAR operations ($601.3 million revenue contribution) and higher transmission segment revenues due to increased infrastructure investment.
- Earnings Decline: Net income attributable to controlling interest decreased 25% to $143.6 million. This decline is largely attributable to non-recurring merger and settlement costs totaling approximately $92.6 million (after-tax) for the six-month period. Excluding these costs, non-GAAP earnings were $236.2 million.
- EPS Dilution: Diluted EPS fell to $0.60 from $1.08. While the merger added $35.9 million in earnings, the issuance of approximately 136 million new shares to NSTAR shareholders resulted in no EPS contribution from the acquired entity for the period.
- Balance Sheet Expansion: Total assets increased by $11.9 billion to $27.5 billion, reflecting the fair value of assets acquired in the NSTAR merger, including $3.2 billion in goodwill. Long-term debt increased by $2.3 billion to fund the merger and capital projects.
- Cash Flow Reduction: Operating cash flows decreased significantly ($366 million drop) due to $176.8 million in storm cost disbursements (Tropical Storm Irene and October 2011 snowstorm), $133.4 million in pension contributions, and $46 million in customer bill credits mandated by settlement agreements.
Guidance, Outlook, and Risks
- Merger Integration: Management is integrating NSTAR operations, processes, and internal controls. The merger was structured as a "merger of equals" with a fixed exchange ratio.
- Regulatory Settlements: The company incurred significant costs related to Connecticut and Massachusetts settlement agreements, including customer bill credits ($46 million) and a $40 million reduction in deferred storm cost recovery at CL&P.
- Capital Expenditures: Capital spending is elevated ($690.4 million in H1 2012) to support major transmission projects, including the Greater Springfield Reliability Project (GSRP) and the Northern Pass transmission line. Total expected cost for NU's share of NEEWS projects is approximately $1.3 billion.
- Key Risks:
- Goodwill Impairment: Goodwill totaled $3.5 billion (38% of equity). An impairment charge could materially affect results.
- Regulatory Actions: Ongoing FERC proceedings regarding the base Return on Equity (ROE) for transmission rates could impact earnings. A 10 basis point change in ROE would impact annual earnings by approximately $2 million.
- Storm Costs: Uncertainty remains regarding the recovery of deferred storm costs and potential penalties from the Connecticut PURA regarding storm response performance.
- Bad Debt Reserve: NSTAR Electric recorded a $28 million reserve in Q1 2012 regarding Basic Service bad debt recovery, though the outcome remains uncertain pending DPU proceedings.
Investor Verification Checklist
- Merger Accounting: Verify the preliminary purchase price allocation and the treatment of the $3.2 billion goodwill recorded from the NSTAR acquisition.
- Non-GAAP Reconciliation: Review the reconciliation of GAAP Net Income to Non-GAAP earnings to understand the full impact of the $92.6 million in merger and settlement costs.
- Storm Cost Recovery: Monitor the status of the $283 million in deferred storm costs at CL&P and the potential for disallowance or penalties by the Connecticut PURA.
- FERC ROE Proceedings: Track the FERC complaint regarding the 11.14% base ROE, as a reduction to 9.2% would negatively impact transmission earnings.
- Capital Project Timelines: Confirm the progress and cost estimates for the GSRP and Northern Pass projects, which represent significant future cash outflows.