Eversource Energy Q1 2018 Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2018; comparative figures are for the three months ended March 31, 2017. Eversource is a regulated energy and water delivery holding company serving about four million customers in Connecticut, Massachusetts and New Hampshire. The combined filing also reports separately for CL&P, NSTAR Electric and PSNH. Results are unaudited and are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $2,288.0 million | $2,105.1 million | +$182.9 million |
| Operating income | $442.5 million | $501.0 million | -$58.5 million |
| Net income attributable to common shareholders | $269.5 million | $259.5 million | +$10.0 million |
| Diluted EPS | $0.85 | $0.82 | +$0.03 |
| Operating cash flow | $177.7 million | $445.3 million | -$267.6 million |
| Cash capital investment in property, plant and equipment | $607.3 million | $523.6 million | +$83.8 million |
- Operating margin declined to approximately 19.3% from 23.8%, while net income attributable to common shareholders rose about 3.9%. Revenue growth included tracked energy and transmission costs, which generally have offsetting expenses and do not affect earnings.
- Operating cash flow less cash property investment was negative approximately $429.6 million, versus negative $78.2 million in Q1 2017. Management attributed the operating cash flow decline mainly to higher pension and PBOP contributions, storm-restoration payments, receivables collection timing and income-tax payment timing.
- At March 31, cash and cash equivalents were $303.8 million, total assets $37.04 billion, and total capitalization $23.36 billion. Long-term debt, including its current portion, was approximately $13.11 billion; notes payable were $1.05 billion. Current assets of $2.77 billion compared with current liabilities of $4.10 billion.
- Quarter-end commercial paper borrowings were $682.3 million at Eversource parent and $367.0 million at NSTAR Electric; respective unused program capacity was $767.7 million and $283.0 million. No borrowings were outstanding under the parent or NSTAR Electric revolving credit facilities.
- Cash dividends declared were $0.51 per common share. The Board subsequently approved a $0.505-per-share dividend payable June 29, 2018.
Material changes versus the prior comparable period
- Segment earnings: electric distribution $104.2 million, down $9.9 million; electric transmission $107.4 million, up $13.2 million; natural gas distribution $57.8 million, up $7.0 million; and water distribution $1.5 million, reflecting Aquarion, acquired in December 2017.
- Electric distribution earnings were reduced by the sale of PSNH thermal generation assets, higher non-tracked operating and maintenance costs, depreciation and property taxes. Transmission benefited from higher rate base and infrastructure investment. Natural gas benefited from colder January weather, customer growth and the lower tax rate.
- Operating income fell despite higher revenue, as purchased power, fuel and transmission costs rose $193.2 million and depreciation, amortization and other taxes also increased. Income-tax expense fell $74.0 million, primarily reflecting the federal corporate rate reduction from 35% to 21%.
- Q1 2018 operating revenue included a $19 million increase in both revenue and purchased-power expense from a new accounting presentation of ISO-New England transactions net by hour rather than net by month, with no net-income impact. Prior-period results were not restated for the revenue standard.
- PSNH completed the sale of its thermal generation assets on January 10 for net proceeds of $134.1 million. Sale of its hydroelectric assets was expected in Q2 2018.
Outlook, commentary, risks and unusual items
- The filing provides no specific company-wide earnings or revenue guidance. Management cited continued investment in electric transmission, distribution reliability and grid modernization. Consolidated capital expenditures, including non-cash items, were $496.2 million in Q1 2018, compared with $446.4 million in Q1 2017.
- Northern Pass faced significant permitting setbacks: New Hampshire’s site evaluation committee denied its siting application, and Massachusetts utilities terminated its conditional selection and contract negotiations. Eversource had $289 million of capitalized project costs and concluded they remained recoverable because the project was still considered probable. A future adverse recoverability conclusion could result in most of those costs being written off, materially harming financial position and results.
- March storms caused extensive damage and outages. Approximately $156 million of restoration costs were deferred for expected recovery through state regulatory processes; recovery is subject to regulatory requirements and management’s assessment.
- The Tax Cuts and Jobs Act resulted in a $26 million Q1 revenue reserve to reflect amounts expected to be returned to customers, and approximately $2.9 billion of provisional excess deferred-tax liabilities recorded as regulatory liabilities. Refund timing and mechanisms remained under regulatory review.
- FERC transmission return-on-equity complaints remain unresolved. A $39.1 million pre-tax reserve remained for the second complaint period; the company could not estimate the ultimate effect. The FERC administrative law judge found the existing 10.57% base ROE and 11.74% incentive cap not unjust or unreasonable in the fourth complaint, but that was an initial decision.
- Other notable matters include $63.8 million of environmental remediation reserves; the Boston Harbor cable settlement, with $2.1 million of additional Q1 expense and construction expected through 2019; and a subsequent CL&P rate-case settlement approved April 18, providing staged rate increases beginning May 1, 2018. PSNH’s approximately $636 million securitized rate-reduction bonds were priced May 1, after quarter-end.
Important facts for investors to verify
- Whether Northern Pass obtains rehearing or other approvals and whether the $289 million project asset remains recoverable.
- Regulatory approval, timing and actual recovery of the $156 million storm costs and the refund of tax benefits to customers.
- Final outcomes and potential financial effects of the FERC ROE complaints, including the $39.1 million reserve.
- Completion and proceeds of the PSNH hydroelectric asset sale and issuance and use of the securitized bonds.
- Whether operating cash flow recovers as storm payments, pension contributions and working-capital timing normalize, alongside the company’s substantial capital investment program and debt maturities.