Business context and reporting period
Northeast Utilities (NU) filed this unaudited combined Form 10-Q for the three months ended March 31, 2012, with separate financial statements for CL&P, PSNH and WMECO. Although the request metadata says “2012 Q4,” the filing is for first-quarter 2012. Results do not include NSTAR; NU completed its merger with NSTAR on April 10, 2012, and expected to include NSTAR beginning in the second quarter.
NU is a regulated electric and natural-gas utility and transmission business serving New England. The merger was structured as a stock-for-stock merger of equals; NU issued about 136 million shares, bringing shares outstanding to approximately 314 million. The preliminary purchase price was $5.038 billion, and the purchase-price allocation remained subject to change.
Key financial metrics
NU consolidated figures below are for Q1 2012 versus Q1 2011; dollar amounts are millions unless stated otherwise.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $1,099.6 | $1,235.3 | (11.0%) |
| Operating income | $214.4 | $227.4 | (5.7%) |
| Operating margin | 19.5% | 18.4% | +1.1 percentage points |
| Net income attributable to controlling interests | $99.3 | $114.2 | (13.0%) |
| Diluted EPS | $0.56 | $0.64 | (12.5%) |
| Dividend declared per share | $0.29 | $0.28 | Higher |
| Cash from operating activities | $8.8 | $372.8 | Down sharply |
| Cash capital expenditures | $304.3 | $236.7 | Up $67.6 |
Operating margin is calculated from reported revenue and operating income. NU’s MD&A separately reports operating cash flow net of rate-reduction-bond payments as $9.1 million in Q1 2012 versus $355.9 million in Q1 2011.
At March 31, 2012, NU had $283.4 million in cash, total assets of $16.0 billion, current assets of $1.52 billion and current liabilities of $1.97 billion (current ratio about 0.77). Notes payable to banks were $660 million; current and long-term debt were $267.3 million and $4.98 billion, respectively. Rate-reduction bonds were a further $94.4 million. Total equity was $4.07 billion.
At the subsidiary level, CL&P reported revenue of $592.0 million and net income of $54.0 million, down from $673.7 million and $64.3 million. PSNH reported revenue of $243.0 million and net income of $21.3 million, down from $269.5 million and $27.5 million. WMECO reported revenue of $114.0 million and net income of $14.2 million, up from $106.7 million and $10.0 million.
Material changes and management commentary
- NU’s controlling-interest earnings fell by $14.9 million. Management attributed the decline mainly to much milder winter weather than in 2011 and higher pension and other employee costs. Weather-related lower retail electricity sales and lower natural-gas volumes reduced distribution earnings; transmission earnings improved with investment in infrastructure.
- Electric sales fell 5.0% overall and firm natural-gas sales fell 13.2% year over year. Management said weather-normalized natural-gas sales increased 5.0%, indicating the importance of weather to reported volumes.
- Operating cash flow was pressured by about $153 million of storm-related cash disbursements, a $92 million pension contribution, approximately $27 million of CL&P customer bill credits, and undercollections in CL&P tracking mechanisms. Capital spending rose, particularly for transmission work, including the Greater Springfield Reliability Project.
- NU issued $300 million of floating-rate notes due September 2013, initially bearing 1.22% interest, and used proceeds primarily to fund repayment of $263 million of notes due April 1, 2012. CL&P had $275 million outstanding under a new $300 million revolving credit facility at a 1.5% weighted-average rate.
- Merger-related costs were $1.1 million after tax for NU in Q1 2012, versus $8.3 million in Q1 2011. Management cited lower merger costs as a partial offset to the operating earnings decline.
Outlook, risks and contingencies
- NU said it was not providing merged-company 2012 guidance. It expected second-quarter pre-tax charges under regulatory settlements, including $40 million for CL&P storm-cost recovery foregone, $25 million of CL&P customer credits, $15 million for a Connecticut energy-goals fund, and $21 million of credits for NSTAR Electric, NSTAR Gas and WMECO. About $56.2 million of additional merger-related costs were also expected in Q2.
- Connecticut and Massachusetts merger settlements include distribution-rate freezes, customer credits and other commitments. CL&P agreed to forego recovery of $40 million of storm costs; remaining approved storm costs are to be collected over six years starting December 2014, subject to regulatory review.
- A FERC complaint seeks to reduce the New England transmission owners’ base return on equity from 11.14% to 9.2%, potentially retroactive to October 1, 2011. FERC established settlement and hearing procedures; management could not predict the outcome. NU estimated each 10-basis-point change in authorized ROE could change annual consolidated earnings by about $2 million.
- Northern Pass faces permitting, siting and land-acquisition uncertainty. A New Hampshire law restricts eminent domain for non-reliability transmission projects. NU estimated project cost at approximately $1.1 billion and anticipated construction in 2014 and completion in late 2016, while noting possible delays.
- PSNH’s Clean Air Project was placed in service in September 2011. Temporary rates effective April 16, 2012 allow recovery of a significant portion of its costs; permanent recovery remains subject to prudence review and regulatory approval.
- Environmental remediation, pension funding and debt refinancing remain relevant exposures. NU expected to contribute approximately $197.3 million to its pension plan during 2012 and had contributed $92 million in Q1. NU reported debt-covenant compliance at quarter-end. Ratings were generally stable, though rating-agency actions varied by issuer.
- Management identified regulatory decisions, weather, demand, interest rates, capital-market access, capital spending, ratings, merger integration and other factors as risks to forward-looking results. It reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the reporting period: the filing covers the quarter ended March 31, 2012, not Q4 2012.
- Track whether lower earnings persist after weather normalizes, and assess the effects of pension and employee costs and the merger.
- Verify cash generation, storm-related outlays, pension contributions and funding needs against the increased short-term borrowing and capital program.
- Monitor implementation and final accounting for the NSTAR merger, including settlement charges, integration costs, share dilution and realized benefits.
- Follow the FERC transmission ROE case, Connecticut storm-cost recovery and rate commitments, and PSNH Clean Air Project recovery proceedings.
- Check Northern Pass permitting, route, land rights, schedule and estimated cost, as well as progress and spending on major transmission projects.