Eversource Energy — Q3 2017 Form 10-Q
Business context and period: Combined unaudited filing for Eversource Energy and four utility subsidiaries, for the quarter and nine months ended September 30, 2017. Eversource is a regulated energy-delivery holding company serving approximately 3.7 million electric and natural-gas customers in Connecticut, Massachusetts, and New Hampshire. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenues | $1,988.5 | $2,039.7 | $5,856.5 | $5,862.5 |
| Operating income | $502.6 | $509.9 | $1,467.3 | $1,421.8 |
| Net income attributable to common shareholders | $260.4 | $265.3 | $750.6 | $713.1 |
| Diluted EPS | $0.82 | $0.83 | $2.36 | $2.24 |
| Operating cash flow | Not provided separately | Not provided separately | $1,492.1 | $1,650.4 |
| Capital investment in property, plant and equipment | Not provided separately | Not provided separately | $1,642.3 | $1,359.2 |
- Q3 revenue fell 2.5% and common-shareholder net income fell 1.8% year over year; nine-month revenue was nearly flat while net income rose 5.3%.
- Approximate consolidated operating margin was 25.3% in Q3 2017 versus 25.0% in Q3 2016, and 25.1% for nine months versus 24.3% in 2016. Approximate nine-month net margin attributable to common shareholders was 12.8% versus 12.2%.
- Cash from operations was below reported capital investment by about $150 million in the first nine months, compared with operating cash flow exceeding investment by about $291 million in the comparable 2016 period.
- Cash and cash equivalents were $125.8 million at September 30, up from $30.3 million at year-end 2016. Eversource reported $10.47 billion of long-term debt and $957.7 million of current maturities at quarter-end. Parent commercial paper borrowings were $917 million, with $533 million of program capacity available; the $1.45 billion revolving facility had no borrowings.
- The declared common dividend was $0.48 per share for Q3 (reported more precisely in the discussion as $0.475 per share); nine-month dividends declared were $1.43 per share.
Material changes and segment trends
- Electric distribution earnings were $157.4 million in Q3, down $12.7 million, but $393.4 million for nine months, up $12.1 million. Mild summer weather, lower usage, and higher depreciation, property tax, and interest costs weighed on Q3; lower year-to-date operations and maintenance expense supported nine-month results.
- Electric transmission earnings increased to $99.0 million in Q3 from $88.4 million and to $289.6 million year to date from $266.6 million, primarily reflecting a larger transmission rate base from infrastructure investment.
- Natural-gas distribution recorded a Q3 loss of $6.2 million, compared with a $7.0 million loss; nine-month earnings were $49.1 million, down from $51.9 million. The year-to-date decline reflected higher depreciation and operating costs and lower Connecticut demand revenues.
- Retail electric sales volumes declined 8.1% in Q3 and 3.7% year to date, attributed chiefly to mild summer weather and conservation. Firm natural-gas sales volumes rose 5.5% in Q3 and 2.3% year to date.
- Interest expense increased 7.0% year to date, primarily due to new debt issuance. Debt issuance during 2017 was used mainly to refinance short-term borrowings, repay maturities, and fund investment and working capital.
Outlook, risks, and unusual items
- No explicit full-year earnings or EPS guidance is provided in the supplied filing text. Management described ongoing utility infrastructure investment and regulatory recovery mechanisms; results remain exposed to weather, customer demand, regulation, capital-market access, interest rates, and execution of major projects.
- On October 29, 2017, after quarter-end, a storm caused extensive damage and outages affecting more than 800,000 customers. Restoration costs were not yet estimable and were expected to be material. The company expected qualifying costs to be deferred and recovered through regulatory processes and did not expect a material impact on operating results.
- Eversource agreed to acquire Aquarion Water Company for $1.675 billion, including approximately $880 million cash and $795 million assumed debt. Most approvals had been received, but Massachusetts approval remained outstanding; closing was expected by December 31, 2017.
- PSNH agreed to sell thermal and hydroelectric generation assets for stated purchase prices of $175 million and $83 million, respectively, subject to adjustments and regulatory approval. The sale application was filed in October 2017; proceeds, operating-period cash flows, and future customer recovery are expected to support recovery of the assets’ costs.
- FERC transmission return-on-equity complaints remain unresolved. FERC rejected the utilities’ proposed reinstatement of higher ROEs in October 2017, leaving a 10.57% base ROE and 11.74% incentive cap temporarily in place. Eversource maintained a $39.1 million pre-tax reserve for the second complaint period; management could not estimate the ultimate effect.
- A Boston Harbor cable settlement resulted in a $4.9 million pre-tax charge at NSTAR Electric in 2017 and a $17.5 million rate-base credit related to the replacement cable. Completion was expected in 2019.
- The Yankee Companies filed DOE Phase IV spent-fuel litigation seeking approximately $100 million in damages; trial was expected in 2018. Eversource reported environmental remediation reserves of $57.7 million across 58 sites.
- The company implemented a new supply-chain management system during Q3, resulting in a material change in internal controls over financial reporting. Management reported disclosure controls as effective and described implementation testing and reviews.
Most important facts for investors to verify
- Whether the Aquarion acquisition received remaining approvals, closed on schedule, and its final financing and integration terms.
- Final storm restoration costs, regulatory recovery timing, and any effects on cash flow or customer rates.
- FERC decisions on transmission ROE complaints, the adequacy of the reserve, and resulting transmission earnings.
- Regulatory approval and final proceeds for PSNH’s generation-asset sales, including recovery of remaining stranded costs.
- Whether capital spending, pension contributions, and debt financing continue to pressure operating cash flow and liquidity.
- Progress and cost exposure for major transmission and distribution projects, including Northern Pass and the Boston Harbor replacement cable.