Business context and reporting period
Eversource Energy’s combined Form 10-K covers the fiscal year ended December 31, 2016, and includes separate reporting for several wholly owned utilities. The company is primarily a regulated electric and natural gas delivery business in Connecticut, Massachusetts and New Hampshire, with electric transmission and some generation activities.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenue | $7.639 billion | $7.955 billion |
| Operating income | $1.860 billion | $1.764 billion |
| Net income attributable to common shareholders | $942.3 million | $878.5 million |
| Diluted EPS | $2.96 | $2.76 |
| Cash flow from operations | $2.175 billion | $1.434 billion |
| Cash capital investment | $1.977 billion | $1.724 billion |
| Cash and cash equivalents at year-end | $30.3 million | $23.9 million |
Operating margin was approximately 24.3% in 2016 versus 22.2% in 2015, calculated from reported operating income and revenue. Revenue fell 4.0%, while common earnings rose 7.3% and diluted EPS increased 7.2%.
At year-end, total assets were $32.05 billion. Long-term debt was $8.83 billion, with $773.9 million classified as current; notes payable were $1.15 billion. Current liabilities exceeded current assets by approximately $1.2 billion, and the current ratio was about 0.68. The company reported compliance with its debt-to-capitalization covenant, which limits the ratio to 65%. Cash from operations exceeded cash property investment by about $198 million; this simple difference is not a measure of free cash flow under the company’s presentation.
2016 diluted EPS by segment was $1.46 electric distribution, $1.16 electric transmission and $0.24 natural gas distribution; parent and other companies contributed $0.10. The common dividend declared was $1.78 per share, up from $1.67.
Material changes versus the prior period
- Electric transmission earnings increased, supported by a larger rate base, recovery of $27.5 million of merger-related costs, and the absence of some prior-year FERC return-on-equity reserves.
- Electric distribution earnings declined, primarily due to the absence of favorable 2015 NSTAR Electric regulatory items, higher depreciation and operating costs, and lower sales at utilities without decoupling.
- Natural gas distribution earnings increased modestly, helped by NSTAR Gas’s 2016 rate increase and system-enhancement investment returns.
- Operating cash flow increased substantially, in part because 2015 included $302 million of DOE spent-nuclear-fuel payments. 2016 cash flow also benefited from tax refunds and timing of regulatory recoveries.
Outlook, commentary and risks
Management projected 2017 diluted EPS of $3.05–$3.20 and approximately $9.6 billion of capital expenditures for 2017–2020, excluding Access Northeast and Bay State Wind. The board approved a quarterly dividend of $0.475 per share for payment in March 2017, a 6.7% increase from the December 2016 dividend.
Major uncertainties include pending FERC transmission ROE complaints; approval and execution of the planned PSNH generation-asset sale, which management expected by year-end 2017; and permitting, contracting and project economics for Northern Pass and Access Northeast. The filing also identifies regulatory cost-recovery, storms, cyber and physical security, environmental obligations, capital-market access, pension assumptions, and lower demand from efficiency or distributed generation as risks. Recorded environmental remediation liabilities were $65.8 million across 61 sites, largely associated with former manufactured-gas plants. The 2016 goodwill impairment test found no impairment.
Unusual items include a $19.1 million reduction in income tax expense from adopting share-based payment accounting guidance, and cash benefits from extended bonus depreciation. Some DOE damage proceeds received in 2016 were recorded for refund to customers. Management noted warmer weather and conservation reduced energy sales volumes; regulated supply and many tracked costs are passed through to customers, while decoupling protects certain distribution revenues.
Important facts for investors to verify
- Progress and final economics of PSNH’s generation divestiture, including treatment of stranded costs and sale proceeds.
- FERC decisions on transmission ROE complaints and their potential impact on earnings and rates.
- Funding, approvals, schedules and customer-contract structures for Northern Pass, Access Northeast, and the capital program.
- Ability to refinance near-term maturities and fund investment while maintaining liquidity, covenant compliance and dividend growth.
- Recovery of storm and environmental costs, pension funding needs, and the assumptions underlying reported regulatory assets.