EVERSOURCE ENERGY (then Northeast Utilities) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. The filing covers Northeast Utilities (NU) and its regulated utility subsidiaries, including CL&P, NSTAR Electric, PSNH and WMECO. Amounts below are in U.S. dollars; financial figures are generally in millions unless indicated.
Business context and comparability
NU operates regulated electric and natural-gas distribution and transmission businesses in New England. NU acquired NSTAR on April 10, 2012, so NU’s Q1 2013 results include NSTAR, while Q1 2012 consolidated results do not. The reported year-over-year increases therefore are not directly comparable; NSTAR Electric’s standalone results are presented for both periods. Utility demand is seasonal and affected by weather, economic conditions and conservation.
Key financial metrics
| NU consolidated | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $1,995.0 | $1,099.6 |
| Operating income | $418.9 | $214.4 |
| Net income | $230.0 | $100.8 |
| Net income attributable to controlling interest | $228.1 | $99.3 |
| Diluted EPS | $0.72 | $0.56 |
| Dividends declared per common share | $0.37 | $0.29 |
| Cash flow from operating activities | $473.1 | $8.8 |
| Cash capital expenditures | $389.0 | $304.3 |
Operating margin was approximately 21.0% versus 19.5%. NU’s MD&A separately reports operating cash flow net of rate-reduction-bond payments of $410.6 million in Q1 2013 versus cash used of $9.1 million in Q1 2012; this differs from the financial-statement cash-flow totals above because of classification.
At March 31, 2013, NU reported assets of $28.33 billion, cash and cash equivalents of $60.8 million, and current assets of $2.16 billion against current liabilities of $3.84 billion (a working-capital deficit of about $1.68 billion). Debt-related balances included $7.01 billion of long-term debt, $947.3 million of current maturities and $1.287 billion of notes payable. NU had $171 million of remaining capacity under its commercial-paper program; NSTAR Electric had $142 million. NU’s reported total capitalization was $16.51 billion.
Capital spending was concentrated in regulated infrastructure. NU’s cash capital expenditures rose year over year largely because NSTAR was included in 2013; consolidated capital expenditures including specified non-cash items were $299.8 million, compared with $306.5 million.
Material changes and management commentary
- NU reported earnings attributable to controlling interest of $228.1 million, or $0.72 per share, versus $99.3 million, or $0.56 per share. Excluding merger-related costs, management reported $229.9 million, or $0.73 per share, versus $100.4 million, or $0.56 per share.
- Management attributed the improvement principally to NSTAR’s contribution ($67.5 million of Q1 2013 earnings), colder weather and higher sales, transmission investment, lower overall operations and maintenance costs, and a $13.6 million after-tax benefit from resolving a Connecticut tax audit. Higher depreciation and property taxes partly offset these factors.
- Electric and firm natural-gas sales rose substantially at the consolidated level, largely reflecting NSTAR’s inclusion. On a weather-normalized combined basis, management said electric sales were relatively unchanged and firm natural-gas sales increased 2.6%.
- Operating cash flow improved partly because Q1 2013 lacked certain storm-cost disbursements and customer bill credits incurred in Q1 2012; it also reflected NSTAR’s contribution, lower pension contributions, and DOE proceeds received by the Yankee Companies. The $77.9 million DOE proceeds included in NU’s cash-flow reconciliation were invested in nuclear decommissioning trusts and are expected to benefit customers.
- NU’s $400 million CL&P bond issuance in January carried a 2.5% coupon and matures in 2023; proceeds repaid short-term borrowings. PSNH redeemed approximately $109 million of pollution-control revenue bonds on May 1, 2013 using short-term debt.
Outlook, risks and contingencies
- Liquidity and funding: Management expects operating cash flows and access to capital markets to be sufficient for operating needs and forecast capital investment. It noted substantial current-liability excesses over current assets across NU and its subsidiaries and approximately $947 million of NU current liabilities related to long-term debt due within 12 months. NU said it had options to repay or refinance maturities.
- Storm recovery: Deferred storm-restoration costs totaled approximately $715.3 million at March 31, 2013, including $115.4 million for 2013 storms. NU believes recovery is probable and expects no material earnings impact, but recovery depends on regulatory processes. CL&P sought recovery of approximately $414 million plus carrying costs over six years starting in December 2014; NSTAR Electric sought recovery of approximately $35 million over five years starting in January 2014.
- Transmission return on equity: A FERC complaint challenges the 11.14% base ROE used for New England transmission rates. Complainants’ analyses indicated about 8.9%; NU’s transmission owners defended the existing rate. Hearings were scheduled for May 2013, with a FERC decision expected in 2014. Any reduction could lead to customer refunds; NU estimated each 10-basis-point change in authorized ROE would change annual consolidated earnings by about $2.1 million.
- Other regulatory matters: NSTAR Electric’s final recovery for historical safety and reliability program costs remained unresolved; management said a material impact was reasonably possible. A separate Basic Service bad-debt recovery matter also remained pending.
- Projects and outlook: The $718 million Greater Springfield Reliability Project was about 95% complete and expected to enter service in late 2013; management said its total cost could be about 5% lower if conditions remained unchanged. Northern Pass was estimated at approximately $1.2 billion, with completion expected in mid-2017. CL&P’s approved $300 million system-resiliency plan was to be completed over five years. The filing provides no explicit consolidated earnings or EPS guidance.
- Other exposures: Environmental remediation reserves for NU totaled $40.7 million. NU also disclosed guarantees, pension funding obligations, and risks from weather and storms, regulation, capital-market access, interest rates, credit ratings, and merger synergies. Management said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying performance: NU’s Q1 2012 consolidated results exclude NSTAR, and the reported share count also increased following the merger.
- Review the timing, approval and carrying-cost treatment of storm-cost recovery requests, especially CL&P’s and NSTAR Electric’s filings.
- Track the FERC transmission ROE proceedings, potential refund periods and earnings sensitivity.
- Assess refinancing needs and liquidity, including short-term borrowings, current debt maturities and stated commercial-paper capacity.
- Distinguish recurring earnings from the $13.6 million tax-audit benefit and other period-specific cash-flow factors, including DOE proceeds invested in trusts.
- Monitor major transmission projects, pension contributions and regulatory decisions that may affect cost recovery or returns.