Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, for EverSource Energy (operating as Northeast Utilities and subsidiaries). The filing includes consolidated financial statements for Northeast Utilities (NU), The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The company operates primarily as a regulated utility with segments for electric distribution, gas distribution, and transmission, alongside a competitive business segment (NU Enterprises) that is winding down wholesale marketing activities.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|
| Operating Revenues | $1,306.2 million | $4,124.1 million | $4,352.2 million |
| Operating Income | $162.6 million | $559.0 million | $419.5 million |
| Net Income | $66.2 million | $249.5 million | $193.1 million |
| Net Income Attributable to Controlling Interest | $64.8 million | $245.3 million | $188.9 million |
| Diluted EPS | $0.37 | $1.43 | $1.21 |
| Cash and Cash Equivalents | $249.0 million | $249.0 million (Sep 30, 2009) | $89.8 million (Dec 31, 2008) |
| Operating Cash Flow (9 months) | N/A | $761.1 million | $426.3 million |
| Long-Term Debt | N/A | $4,345.0 million | $4,103.2 million |
| Total Assets | N/A | $14,006.3 million | $13,988.5 million |
Material Changes vs. Prior Period
- Earnings Growth: Net income attributable to controlling interests increased by $56.4 million (30%) for the nine months ended September 30, 2009, compared to the same period in 2008. This increase is primarily due to the absence of a $29.8 million after-tax litigation settlement charge recorded in the first quarter of 2008 and higher earnings from transmission and distribution segments.
- Revenue Decline: Operating revenues decreased by $228 million (5%) year-over-year for the nine-month period. This was driven by lower distribution revenues ($318 million decrease) resulting from reduced recovery of fuel and other expenses passed through to customers via regulatory tracking mechanisms, and lower wholesale revenues from CL&P.
- Expense Reduction: Total operating expenses decreased by $368 million (9%). The most significant reduction was in fuel, purchased, and net interchange power expenses, which dropped $252 million due to lower costs at regulated companies.
- Capital Expenditures: Cash capital expenditures decreased significantly to $634.4 million in the first nine months of 2009, compared to $951.8 million in 2008. This reduction was primarily due to the completion of major transmission projects in southwest Connecticut in late 2008.
- Liquidity Improvement: Cash and cash equivalents increased from $89.8 million at year-end 2008 to $249.0 million at September 30, 2009, bolstered by a $380 million common share offering in March 2009 and a $250 million bond issuance by CL&P in February 2009.
Guidance, Outlook, and Risks
- Earnings Guidance: Management projects consolidated 2009 earnings between $1.80 and $1.90 per share. For 2010, the projection is between $1.80 and $2.00 per share.
- Long-Term Growth: The company projects a compound average annual EPS growth rate of 6% to 9% for the five-year period from 2010 to 2014.
- Capital Program: Regulated company capital expenditures are expected to total approximately $6.4 billion from 2010 through 2014. This includes significant investments in the New England East-West Solutions (NEEWS) transmission projects.
- Regulatory Uncertainty: Guidance for the distribution segment in 2010 includes uncertainty regarding the outcomes of rate cases filed by PSNH (June 2009) and expected to be filed by CL&P (late 2009/early 2010).
- Risks and Contingencies:
- Derivative Exposure: NU Enterprises holds wholesale derivative contracts subject to mark-to-market accounting. As of September 30, 2009, the fair value of these contracts was a net liability of $45.4 million. A 30% decrease in forward market prices could result in a nominal pre-tax earnings impact of $0.7 million.
- Environmental Remediation: Holyoke Water Power Company (HWP) has a reserve of approximately $1.8 million for tar remediation at a former manufactured gas plant site. Management estimates probable costs between $1.8 million and $2.5 million, though further developments could require a material increase.
- Collateral Requirements: If NU parent's credit ratings were downgraded below investment grade, additional collateral of approximately $29.1 million would be required for Select Energy contracts. If PSNH's ratings were downgraded below investment grade, an additional $14.8 million in collateral would be required.
Investor Verification Checklist
- Rate Case Outcomes: Verify the final decisions on the PSNH and CL&P distribution rate cases, as these directly impact the 2010 earnings guidance for the distribution segment.
- Transmission Project Timelines: Monitor the siting approval process for the NEEWS projects (Greater Springfield, Interstate, and Central Connecticut Reliability Projects), as delays could impact capital expenditure schedules and rate base growth.
- Wholesale Portfolio Wind-Down: Track the realization of fair value changes in NU Enterprises' remaining wholesale contracts, which are subject to market volatility and mark-to-market accounting.
- Uncollectible Receivables: Review trends in bad debt expense, which increased by approximately $23.6 million year-over-year for the nine-month period due to weak economic conditions in the Northeast.
- Pension Funding: Confirm the timing and amount of future pension contributions, with an estimated $50 million contribution expected in the third quarter of 2010 and $200-$250 million in 2011.