Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010, for Northeast Utilities (NU) and its subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The registrants are regulated utility companies operating in Connecticut, New Hampshire, and Massachusetts, providing electric and natural gas distribution and transmission services. The filing includes unaudited condensed consolidated financial statements for the combined entities and individual subsidiaries.
Key Financial Metrics
| Metric (NU Consolidated) | Q1 2010 | Q1 2009 |
|---|---|---|
| Operating Revenues | $1,339.4 million | $1,593.5 million |
| Operating Income | $226.7 million | $217.3 million |
| Net Income | $87.6 million | $99.1 million |
| Net Income Attributable to Controlling Interest | $86.2 million | $97.7 million |
| Diluted Earnings Per Share (EPS) | $0.49 | $0.60 |
| Cash Flows from Operating Activities | $225.7 million | $139.9 million |
| Cash and Cash Equivalents (End of Period) | $30.0 million | $416.8 million |
| Long-Term Debt | $4,588.9 million | $4,492.9 million |
| Total Assets | $14,105.4 million | $14,057.7 million |
Note: Q1 2009 cash balance was significantly higher due to a large equity issuance in March 2009.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased by $254 million (16%) primarily due to a 4.9% decline in retail electric sales caused by warmer-than-normal weather and lower recovery of fuel costs through regulatory tracking mechanisms.
- Earnings Decline: Net income attributable to controlling interest decreased by $11.5 million (12%). This was driven by lower distribution segment earnings and a net after-tax charge of $3 million related to the 2010 Healthcare Act.
- Operating Income Increase: Despite lower revenues, operating income increased by $9.4 million (4%) due to a $236 million decrease in fuel and purchased power expenses, which outpaced the revenue decline.
- Segment Performance:
- Transmission: Earnings increased to $40.1 million (from $35.4 million) due to increased investment in infrastructure.
- Distribution: Earnings decreased to $47.9 million (from $59.2 million) due to lower sales volumes and higher employee benefit costs.
- Competitive Businesses (NU Enterprises): Earnings decreased to $2.3 million (from $5.8 million) due to a mark-to-market loss on remaining wholesale contracts.
Guidance, Outlook, and Risks
- 2010 EPS Guidance: Management reaffirmed full-year 2010 diluted EPS guidance of $1.80 to $2.00. This includes distribution segment earnings of $0.95–$1.05, transmission earnings of $0.90–$0.95, and competitive business earnings of $0.00–$0.05.
- Capital Expenditures: Projected total capital expenditures for 2010 remain at approximately $1.1 billion.
- 2010 Healthcare Act Impact: The legislation eliminated tax deductibility for certain retiree health care contributions. NU recorded an $18 million pre-tax charge to income tax expense, with approximately $15 million deferred as a regulatory asset for future rate recovery, resulting in a net $3 million charge to current earnings.
- Major Storms: Severe storms in February and March 2010 caused widespread outages. Restoration costs are estimated at $24 million for PSNH and $21 million for CL&P. Management expects these costs to be recoverable through insurance, customer-funded reserves, and rates.
- Regulatory Matters:
- CL&P: Filed a rate case seeking a $133.4 million increase effective July 1, 2010. A decision is expected in June 2010.
- PSNH: Submitted a proposed settlement for a permanent rate increase of $45.5 million effective July 1, 2010. A decision is expected in June 2010.
- Liquidity: The company maintains stable credit ratings (Baa2/BBB- for NU parent). Revolving credit availability was $694.1 million as of March 31, 2010. A $45 million pension contribution is expected in Q3 2010.
Investor Verification Checklist
- Weather Normalization: Verify the extent to which Q1 2010 earnings were impacted by warmer weather versus structural economic factors, as weather normalization shows a smaller sales decline than actuals.
- Healthcare Act Recovery: Confirm the regulatory approval status for the $15 million deferred tax asset related to the 2010 Healthcare Act to ensure future rate recovery is probable.
- Storm Cost Recovery: Monitor the regulatory dockets for CL&P and PSNH to confirm the timeline and mechanism for recovering the ~$45 million in storm restoration costs.
- Rate Case Outcomes: Track the June 2010 decisions on CL&P and PSNH rate cases, as these are critical to achieving the projected 2010 EPS guidance and regulatory ROE targets.
- Capital Program Execution: Review progress on the $1.1 billion capital program, specifically the GSRP and Northern Pass transmission projects, for potential cost overruns or siting delays.