Eversource Energy (then Northeast Utilities) — Form 10-Q Summary
Business context and reporting period. This combined, unaudited filing covers Northeast Utilities (NU) and subsidiaries, including CL&P, PSNH and WMECO, for the quarter and nine months ended September 30, 2010. NU’s regulated electric and natural-gas distribution, transmission and generation businesses accounted for substantially all consolidated revenue. Amounts below are U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $1,243.3 | $1,306.2 | $3,694.2 | $4,124.1 |
| Operating income | $199.6 | $162.6 | $604.6 | $559.0 |
| Net income attributable to controlling interests | $100.5 | $64.8 | $258.7 | $245.3 |
| Diluted EPS | $0.57 | $0.37 | $1.46 | $1.43 |
| Dividend declared per common share | $0.26 | $0.24 | $0.77 | $0.71 |
- Operating margin was approximately 16.1% in Q3 2010 versus 12.4% in Q3 2009, and 16.4% for the first nine months versus 13.6%. These are calculated from reported operating income and revenue.
- Q3 revenue fell 5%, while operating income rose 23% and attributable net income rose 55%. Nine-month revenue declined 10%, while operating income rose 8% and net income rose 5%.
- NU reported cash and cash equivalents of $41.2 million at September 30, 2010, versus $27.0 million at December 31, 2009. Current assets were $1,236.0 million and current liabilities $1,057.1 million.
- For the nine months, GAAP operating cash flow was $843.6 million, investing cash flow was negative $689.8 million, and financing cash flow was negative $139.7 million. Cash capital expenditures were $677.6 million. Management also reported operating cash flow of $647.9 million after rate-reduction-bond payments, which are classified as financing cash flows in the statements.
- NU’s September 30 balance sheet reported $4,636.0 million of long-term debt, $66.3 million of current long-term debt, $156.0 million of bank notes payable and $246.7 million of rate-reduction bonds. Debt and equity capitalization totaled $8,476.3 million. NU had $704.4 million of aggregate availability under revolving credit lines; it reported compliance with debt covenants.
Material changes and management commentary
- Q3 earnings improved principally on higher electric sales during unusually warm weather, lower operating and maintenance costs, distribution rate-case outcomes effective in 2010, reduced uncollectibles expense and higher transmission earnings. Lower fuel and purchased-power costs also reduced reported revenue and expenses because many supply costs flow through customer-rate mechanisms without affecting earnings.
- Retail electric sales rose 6.5% in Q3 and 2.3% year to date; firm natural-gas sales increased 9.9% in Q3 but declined 1.2% year to date. Management said weather-normalized electric sales were lower, citing conservation and economic conditions.
- NU raised its 2010 diluted EPS guidance from $1.95–$2.05 to $2.10–$2.20. The range includes an expected $0.09-per-share tax-settlement benefit and an approximately $0.07-per-share merger-cost charge; the filing’s business-level outlook also presents earnings excluding these items. Management attributed the increase to stronger summer sales, cost control, lower uncollectibles and the anticipated tax settlement.
- Management forecast $800–$850 million of 2010 operating cash flow after rate-reduction-bond payments, including an estimated $100 million cash-flow benefit from extended bonus depreciation. It expected approximately $200 million of pension contributions in 2011; PSNH contributed $45 million to the pension plan in 2010.
- For 2011–2015, NU projected approximately $6.6 billion in capital expenditures and regulated-company rate base growth from about $7.4 billion at year-end 2010 to $11.9 billion at year-end 2015. It projected annual EPS growth of 6%–9% for 2011–2015, using 2009 EPS as the base; the high end assumed completion of the NSTAR merger.
Outlook, transactions, risks and unusual items
- Proposed NSTAR merger: Announced October 18, 2010 as a merger of equals, with NSTAR shareholders to receive 1.312 NU shares per NSTAR share. The companies expected to seek shareholder approval in early 2011 and target closing in Q3 2011, subject to shareholder, regulatory and other approvals. NU anticipated issuing about 137 million shares. Merger-related class-action suits sought, among other remedies, to block the transaction; NU said it considered them without merit. If the merger fails under specified circumstances, NU could owe a $135 million termination fee plus up to $35 million of certain NSTAR expenses, in addition to its own costs.
- Transmission investment: NU’s estimated share of the Northern Pass project was approximately $830 million of an expected $1.1 billion total cost. The project remained subject to permitting and regulatory approval; service was anticipated in late 2015 if approvals were timely. NU also increased its NEEWS project cost estimate to $1.52 billion and revised certain project costs and schedules.
- Regulatory and operating exposure: Utility earnings depend on rate decisions and recovery through customer tariffs. Risks identified include regulatory actions, economic conditions, weather, capital-market access, interest rates, bad debt, capital-expenditure timing, rating-agency actions, legal developments and merger outcomes. Management said weather-normalized electric demand was affected by conservation and weak economic conditions.
- Contingencies and unusual items: NU recorded an approximately $3 million after-tax charge related to the 2010 Healthcare Act, partly deferring recoverable costs for future rates. A subsidiary reported a $3.2 million reserve for an MGP-related river-site cleanup and recorded a $1.6 million Q3 charge; management said the reserve was at the low end of probable costs and additional costs could not be reasonably estimated. The Yankee Companies received a $142.6 million trial-court judgment against the U.S. Department of Energy over spent-fuel disposal, subject to reconsideration and appeal; any ultimate recovery would benefit customers under applicable rate settlements.
- In October 2010, NU settled tax matters expected to produce an approximately $33 million after-tax Q4 gain. The filing also described credit-rating and collateral triggers, environmental liabilities, and regulatory approval and construction risks for major capital projects.
Most important facts for investors to verify
- Whether the NSTAR merger receives required shareholder and regulatory approvals, closes on the expected timetable, and delivers anticipated benefits; also monitor merger litigation and costs.
- Whether 2010 EPS and operating-cash-flow guidance was achieved, including the tax-settlement benefit, merger-cost charge and bonus-depreciation cash-flow impact.
- Execution, final costs, schedules, financing and regulatory approvals for Northern Pass, NEEWS and other major capital programs, and the timing of rate-base recovery.
- Cash needs and funding capacity, especially planned 2011 pension contributions, debt maturities and tenders, credit-facility availability, and credit-rating or collateral-trigger effects.
- Final outcomes of environmental remediation estimates, DOE spent-fuel litigation, pending rate proceedings and storm-cost recovery.