Eversource Energy (Northeast Utilities) — Q3 2013 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2013; results are unaudited. Northeast Utilities (NU), now Eversource Energy, is a regulated energy-delivery holding company serving approximately 3.6 million electric and natural-gas customers in Connecticut, Massachusetts and New Hampshire. Its subsidiaries include CL&P, NSTAR Electric, PSNH, WMECO, Yankee Gas and NSTAR Gas.
NU completed its NSTAR merger on April 10, 2012. Consequently, NU’s 2012 nine-month comparison excludes NSTAR’s first-quarter results; year-over-year growth is not fully comparable.
Financial performance and position
Amounts below are in millions of dollars, except per-share data. Consolidated financial statements are for NU.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $1,892.6 | $1,861.5 | $5,523.5 | $4,589.8 |
| Operating income | $399.3 | $412.9 | $1,168.8 | $786.8 |
| Net income attributable to controlling interest | $209.5 | $207.6 | $608.6 | $351.2 |
| Diluted EPS | $0.66 | $0.66 | $1.93 | $1.32 |
| Dividends declared per common share | $0.37 | $0.34 | $1.10 | $0.97 |
- Margins: Operating margin was approximately 21.1% in Q3 2013 versus 22.2% in Q3 2012, and 21.2% for the first nine months versus 17.1%. The nine-month increase reflects, in part, NSTAR’s inclusion in 2013 but not in Q1 2012.
- Adjusted earnings: Excluding merger and integration costs, management reported non-GAAP earnings of $216.5 million, or $0.69 per share, for Q3 2013, versus $220.5 million, or $0.70, in Q3 2012. For the first nine months, adjusted earnings were $619.2 million, or $1.96 per share, versus $456.7 million, or $1.72. These are non-GAAP measures.
- Cash flow and investment: Cash from operations was $1,177.0 million for the first nine months, versus $796.0 million in 2012. Capital investment in property, plant and equipment was $1,073.8 million; investing cash flow was $(1,059.0) million and financing cash flow $(105.8) million. Cash increased $12.2 million to $57.9 million.
- Debt and liquidity: At September 30, NU reported $1,343.0 million of notes payable, $608.3 million of current long-term debt and $7,444.2 million of long-term debt—approximately $9.4 billion combined. Current liabilities exceeded current assets by approximately $1.4 billion. NU had $263 million of available capacity under its commercial-paper program; NSTAR Electric had $294 million available under its program. The joint revolving credit facility was increased to $1.45 billion.
Material changes versus prior period
- Q3 revenue rose 1.7%, while operating income declined 3.3%; reported controlling-interest net income rose slightly and diluted EPS was unchanged.
- Nine-month revenue increased 20.3% and reported controlling-interest net income increased to $608.6 million. Management attributed much of the increase to NSTAR’s inclusion for all of 2013, compared with its inclusion only from April 10 in 2012.
- Management cited higher transmission investment, colder early-2013 weather and improved operating costs as contributors to year-to-date performance. Q3 electric sales fell 1.6%, which management linked primarily to cooler summer weather and conservation; nine-month electric sales rose 0.6%. Firm natural-gas sales rose 13.3% for the first nine months, with weather and customer growth contributing.
- Cash from operations increased year over year, reflecting NSTAR’s contribution, lower storm-related cash disbursements and the absence of certain prior-year customer credits and merger costs; higher pension contributions partly offset these benefits.
Outlook, risks, contingencies and unusual items
- FERC transmission return proceeding: An administrative law judge recommended base ROEs of 10.6% for the refund period and 9.7% prospectively, versus the then-current 11.14%. This is not a final FERC decision; management expected a decision in 2014. NU recorded a $14.3 million after-tax reserve. Management estimated each 10-basis-point change in the prospective authorized ROE could affect annual consolidated earnings by approximately $2.4 million.
- Storm-cost recovery: Approximately $690.4 million of storm restoration costs were deferred for future recovery. Recovery remained subject to regulatory processes; management considered recovery probable. CL&P sought recovery of approximately $414 million, plus carrying costs, over six years beginning December 2014.
- Other regulatory uncertainty: PSNH’s generation assets and default-service arrangements were under NHPUC review, and the prudence and permanent recovery of PSNH’s Clean Air Project costs remained under review. Management said it could not predict the outcomes but believed costs were recoverable.
- Costs and tax items: NU recorded $9.2 million of pre-tax severance expense in Q3 related to partial IT outsourcing; the quarter-end severance accrual was $14.2 million. CL&P recorded a $10.5 million after-tax valuation allowance related to new federal tangible-property tax regulations, which management was still evaluating. A Massachusetts tax-rate change increased deferred tax liabilities with an offsetting regulatory asset of approximately $61 million.
- Projects and commitments: The $718 million Greater Springfield Reliability Project was approximately 98% complete and expected to enter service in late 2013, at an estimated cost about 6% below budget. The $1.4 billion Northern Pass project remained subject to permitting and was expected to be operational by mid-2017. New long-term renewable-energy purchase commitments are contingent on future project construction.
- Guidance: The provided filing text does not state a clear numerical full-year earnings or EPS forecast. Management cautioned that results are affected by weather, demand, regulation, capital-market access, capital spending and other factors.
Most important facts for investors to verify
- How much of nine-month earnings growth reflects NSTAR’s merger-related inclusion and other nonrecurring or comparative-period effects.
- The final FERC ROE decision, resulting refund exposure, and potential effects on transmission earnings.
- Whether storm restoration costs and PSNH generation and Clean Air Project costs are ultimately approved for recovery, and on what schedule.
- Liquidity and refinancing needs given the working-capital deficit, debt maturities and reliance on short-term borrowing and capital markets.
- Project permitting, timing, cost and recovery for Northern Pass, transmission investments and renewable contracts.