Business context and reporting period
This combined, unaudited Form 10-Q covers the three months ended March 31, 2014. The principal registrant was Northeast Utilities (the company now known as Eversource Energy), alongside its regulated utility subsidiaries. The group delivered electricity and natural gas to approximately 3.6 million customers in Connecticut, Massachusetts, and New Hampshire.
Financial results and liquidity
- Revenue and earnings: Operating revenues were $2.291 billion, up 14.8% from $1.995 billion. Operating income was $467.7 million, up 11.6%; net income attributable to controlling interest was $236.0 million, versus $228.1 million. Diluted EPS was $0.74, versus $0.72.
- Margins: Operating margin was approximately 20.4%, compared with 21.0% a year earlier. Higher pass-through energy costs and related revenues contributed to revenue growth but generally did not affect earnings.
- Cash flow and investment: Operating cash flow was $493.8 million, compared with $473.1 million. Cash capital investment in property, plant, and equipment was $348.7 million, versus $389.0 million. Cash and cash equivalents were $89.2 million at quarter-end, up from $43.4 million at year-end.
- Debt and liquidity: NU reported $818.5 million outstanding under its commercial paper program, with $631.5 million of available capacity on the supporting $1.45 billion revolving facility. The filing reports $8.318 billion of long-term debt and $530.5 million of current long-term debt. Current liabilities exceeded current assets by approximately $424 million; management cited access to operating cash flows and capital markets as sources to meet requirements.
- Shareholder returns: The quarterly common dividend was $0.3925 per share, a 6.8% increase from the December 2013 dividend. First-quarter dividends declared were $0.39 per share.
Material changes versus the prior period
- Management attributed improved earnings primarily to colder weather, which helped lift retail electric sales 4.0% and firm natural gas sales 15.5%, and to a PSNH distribution rate increase. Weather-normalized electric sales rose 1.3% and natural gas sales 3.6%.
- Excluding merger-integration costs, earnings were $241.8 million, or $0.76 per share, versus $229.9 million, or $0.73 per share. Integration costs after tax were $5.8 million, compared with $1.8 million.
- First-quarter 2013 benefited from a $13.6 million state income-tax audit resolution; its absence reduced the year-over-year comparison. Transmission-segment earnings also fell from $79.9 million to $74.9 million, largely reflecting that prior-year benefit.
- NU issued $400 million of long-term debt during the quarter, primarily to refinance maturities. NSTAR Electric issued $300 million of 4.40% debentures due 2044; Yankee Gas issued $100 million of 4.82% bonds due 2044.
Outlook, commentary, risks, and unusual items
- Management said future operating cash flows and access to financial markets are expected to be sufficient for operating needs and forecast capital investment. The filing provides no specific company-wide earnings guidance.
- On March 12, 2014, Connecticut regulators approved recovery of $365 million of CL&P storm-restoration costs, with carrying charges over six years beginning December 1, 2014; approximately $18 million was ordered capitalized as utility plant.
- The Yankee Companies received $163.3 million of DOE damages proceeds in March. The amount was recorded as restricted pending regulatory review and expected refund to member utilities for customers; it did not affect earnings or operating cash flow. A separate DOE Phase III damages case covering 2009–2012 was in discovery.
- A FERC administrative law judge recommended transmission base ROEs of 10.6% for the refund period and 9.7% prospectively, below the existing 11.14%; a final FERC decision was pending. Management estimated each 10-basis-point change in prospective ROE could change annual consolidated earnings by about $2.4 million.
- New Hampshire regulators were examining potential PSNH generation divestiture. A consultant estimated generation-asset fair value at $225 million versus $660 million net book value, implying potential stranded costs above $400 million. Management stated it believed costs and investments remained recoverable; applicable law and the settlement require stranded-cost recovery if assets are divested or retired.
- Other identified exposures include environmental remediation reserves of $35.4 million for NU and regulatory proceedings concerning NSTAR Electric’s safety and reliability program and bad-debt recovery. Key operating risks include weather, regulation, capital-market access, cyber or grid events, and construction execution.
- NU recorded $4.3 million of severance expense in the quarter related to IT outsourcing and post-merger integration. The filing says results for the quarter are not necessarily indicative of full-year results and notes the seasonal influence of weather on energy demand.
Important facts for investors to verify
- Whether colder-weather sales gains persist after normalizing for weather and customer growth, and how energy costs and pass-through mechanisms affect reported revenue and earnings.
- Final FERC decisions on transmission ROE and the potential earnings or refund effects, including the additional complaint seeking a lower rate from January 2013.
- Completion and customer refund of DOE Phase II proceeds, and the status and potential recovery from the Phase III litigation.
- PSNH generation-asset proceedings, the Clean Air Project prudence decision, and the recoverability and timing of any stranded costs.
- Funding and execution of major transmission and distribution projects, including Northern Pass, and the impact of capital spending, debt maturities, and dividends on liquidity.