Eversource Energy 2015 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers the fiscal year ended December 31, 2015, and was filed February 26, 2016. It includes Eversource Energy and utility subsidiaries CL&P, NSTAR Electric, PSNH and WMECO; the broader regulated business also includes natural gas utilities NSTAR Gas and Yankee Gas. Eversource delivers electricity and natural gas in Connecticut, Massachusetts and New Hampshire, with regulated electric distribution, electric transmission and natural gas distribution as its principal segments. The company changed its legal name from Northeast Utilities to Eversource Energy on April 30, 2015.
The filing reports full-year results, with unaudited quarterly data. Fourth-quarter 2015 revenue was $1.691 billion, operating income $385.5 million, net income attributable to common shareholders $181.8 million and diluted EPS $0.57, compared with $1.881 billion, $430.2 million, $221.5 million and $0.69, respectively, in fourth-quarter 2014.
Financial and operating performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $7.955 billion | $7.742 billion | Up 2.7% |
| Operating income | $1.764 billion | $1.633 billion | Up 8.0% |
| Net income attributable to common shareholders | $878.5 million | $819.5 million | Up 7.2% |
| Diluted EPS | $2.76 | $2.58 | Up 7.0% |
| Operating cash flow | $1.424 billion | $1.635 billion | Down $211 million |
| Cash capital investment in property, plant and equipment | $1.724 billion | $1.604 billion | Up $120 million |
| Cash and cash equivalents at year-end | $23.9 million | $38.7 million | Down $14.8 million |
Management also reported non-GAAP 2015 earnings of $894.3 million, or $2.81 per diluted share, excluding $15.8 million of after-tax integration costs. Comparable 2014 non-GAAP earnings were $841.6 million, or $2.65 per share. The company cautions that these non-GAAP measures are not substitutes for GAAP results.
- Margins: Calculated from reported figures, operating margin was approximately 22.2% in 2015 versus 21.1% in 2014; net income attributable to common shareholders was approximately 11.0% of revenue versus 10.6%.
- Segment earnings: Electric distribution earned $507.9 million, electric transmission $304.5 million and natural gas distribution $72.4 million in 2015. Transmission revenue was $1.069 billion; estimated transmission rate base was approximately $5.2 billion at year-end.
- Sales and weather: Retail electric sales rose 0.3% to 54,616 GWh. Firm natural gas sales fell 1.1% to 102,999 million cubic feet; weather-normalized gas sales rose 2.5%. Management attributed reported volume patterns primarily to weather, conservation and customer growth.
- Debt and capitalization: Long-term debt was $8.806 billion and notes payable were $1.161 billion at year-end. The reported capitalization mix was 46% long-term debt, 53% equity and 1% preferred stock. The companies were in compliance with financial covenants, including a maximum consolidated debt-to-capitalization ratio of 65%.
- Liquidity: Current liabilities exceeded current assets by approximately $371 million at Eversource. The parent had about $1.1 billion of commercial paper outstanding and $351.5 million of remaining capacity under its $1.45 billion program; NSTAR Electric had $62.5 million outstanding and $387.5 million of capacity under its $450 million program. Management cited operating cash flow and capital-market access as sources to meet obligations.
- Dividends and investment: Eversource paid $529.8 million in common dividends in 2015, or $1.67 per share. In February 2016, the board declared a quarterly dividend of $0.445 per share, a 6.6% increase from the December 2015 payment. Planned capital expenditures for 2016–2019 were approximately $9.2 billion, excluding Access Northeast and Clean Energy Connect.
Material changes versus the prior comparable period
- Common-share earnings and EPS increased year over year, supported by electric distribution rate increases, favorable regulatory outcomes and higher transmission investment. Lower operating and maintenance expense also contributed; higher depreciation, property taxes and income taxes partly offset gains.
- Operating cash flow declined, primarily reflecting a $302 million payment to settle CL&P’s and WMECO’s pre-1983 spent-nuclear-fuel obligations with the Department of Energy, lower DOE litigation proceeds, and timing of regulatory recoveries and purchased-power costs. Pension and PBOP contributions and income-tax payments were lower and partially offset the decline.
- Cash investment in property, plant and equipment increased. Total capital expenditures, including noncash items, were approximately $1.9 billion in 2015, compared with $1.7 billion in 2014.
- Electric transmission earnings increased to $304.5 million from $295.4 million, helped by a higher rate base and lower FERC ROE-related reserves. Natural gas distribution earnings were essentially flat. Eversource parent and other-company earnings declined to $9.5 million from $11.5 million, partly because the unregulated electrical contracting business was sold in April 2015.
- Eversource issued approximately $1.225 billion of long-term debt and retired approximately $217 million in 2015. The 2015 cash-flow effect also included the nuclear-fuel obligation settlements; CL&P funded its payment with debt, while WMECO liquidated its spent-fuel trust.
Outlook, management commentary, risks and contingencies
- 2016 outlook: Management projected diluted EPS of $2.90–$3.05. The company expected approximately $275 million of 2016 cash-flow benefits from extended accelerated depreciation, including tax refunds and lower expected tax payments.
- New Hampshire generation divestiture: PSNH agreed to divest its generation assets subject to NHPUC approval. A January 2016 stipulation supported approval, but approval and the sale were not final at filing. The agreement includes foregoing $25 million of deferred Clean Air Project equity return, a nonrecoverable $5 million clean-energy contribution, and no general distribution rate increase before July 1, 2017. Management said stranded costs were expected to be recoverable through securitization or rates; failure to obtain approval could impair recovery.
- Transmission returns and competition: FERC set a 10.57% base ROE for the first complaint period and prospectively from October 2014. Appeals and two further ROE complaints remained unresolved; a lower allowed return could reduce earnings and require customer refunds. FERC Order No. 1000 also exposes transmission projects to competitive selection and potential delays.
- Major projects: Access Northeast, a proposed gas pipeline and storage project with a projected total cost of about $3 billion and planned service beginning in 2018, remained subject to regulatory approval. Northern Pass’s estimated cost increased from $1.4 billion to $1.6 billion after a revised route added underground mileage; permitting and selection remained outstanding. These and other large projects face siting, regulatory, community and cost risks.
- Environmental and legal matters: The recorded environmental remediation liability was $51.1 million for 64 sites, including $45.5 million for former manufactured-gas-plant sites; actual costs could be higher. A potential Merrimack Station permit could require cooling-system work that EPA estimated at approximately $112 million over installation and 20 years of operation; no final permit had been issued. A DOE spent-fuel damages case for 2009–2012 was awaiting a court decision.
- Other exposures: Risks include severe weather, cyber or physical attacks, regulatory cost-recovery decisions, capital-market access and borrowing costs, pension assumptions and funding, customer conservation and affordability, and counterparty performance. Goodwill was $3.5 billion; the 2015 annual impairment test found no impairment. The filing recorded $197 million of storm costs pending regulatory approval, while management considered recovery probable.
- Reporting and controls: Deloitte & Touche issued an unqualified opinion on the consolidated financial statements. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2015.
Important facts for investors to verify
- Track NHPUC approval, sale proceeds and stranded-cost recovery for PSNH generation assets, as well as full recovery of Clean Air Project costs.
- Monitor FERC decisions and appeals on transmission ROE, refund reserves and the resulting permitted returns on the approximately $5.2 billion transmission rate base.
- Assess whether the $9.2 billion 2016–2019 capital program, project timing and financing remain consistent with the EPS outlook, credit ratings and dividend growth.
- Review cash generation against investment needs: 2015 operating cash flow was below cash property investment, and year-end current liabilities exceeded current assets.
- Confirm regulatory recovery, timing and ultimate costs for storm restoration, environmental remediation, pension and PBOP obligations, and the major gas and electric transmission projects.
- Compare future GAAP earnings with the company’s non-GAAP measure and identify the impact of integration costs and other one-time regulatory items.