Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, 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, transmission, and generation services. The filing includes unaudited condensed consolidated financial statements for the three and six months ended June 30, 2009, and 2008.
Key Financial Metrics (Six Months Ended June 30, 2009)
- Operating Revenues: $2,817.9 million (NU Consolidated), a 1% decrease from $2,845.3 million in the prior year period.
- Net Income: $183.3 million (NU Consolidated), a 54% increase from $119.0 million in the prior year period.
- Net Income Attributable to Controlling Interests: $180.5 million, or $1.07 per share (fully diluted), compared to $116.2 million ($0.75 per share) in the prior year.
- Operating Income: $396.5 million, a 47% increase from $270.4 million in the prior year.
- Cash Flows from Operating Activities: $508.3 million, a significant increase from $281.8 million in the prior year.
- Cash and Cash Equivalents: $481.1 million as of June 30, 2009, up from $89.8 million at December 31, 2008.
- Long-Term Debt: $4,343.3 million as of June 30, 2009, compared to $4,103.2 million at December 31, 2008.
- Capitalization: Total capitalization was $7,961.3 million, with Common Shareholders' Equity at $3,501.8 million.
Material Changes Versus Prior Period
- Earnings Growth: The 54% increase in net income is primarily driven by higher earnings in regulated distribution and transmission segments and the absence of a $29.8 million after-tax litigation settlement charge recorded in the first quarter of 2008.
- Revenue Trends: Operating revenues decreased slightly due to lower competitive business revenues and lower regulated company revenues. Regulated revenues were impacted by lower wholesale revenues from independent power producers and lower recovery of fuel costs, partially offset by higher transmission revenues from new infrastructure.
- Cost Management: Operating expenses decreased by 6% ($152 million). Fuel and purchased power expenses dropped $62 million, largely due to lower gas prices at Yankee Gas. Maintenance expenses decreased $22 million due to lower storm-related costs compared to the prior year.
- Depreciation: Depreciation expense increased by 14% ($19 million) due to higher plant balances from completed construction programs.
- Regulatory Asset Amortization: Amortization of regulatory assets decreased significantly ($62 million) due to lower recovery of transition costs at CL&P.
- Liquidity: Cash position improved substantially due to a $370.8 million common share offering in March 2009 and a $250 million bond issuance by CL&P in February 2009.
Guidance, Outlook, and Risks
- 2009 EPS Guidance: Management projects consolidated 2009 earnings between $1.80 and $1.90 per share. This range was narrowed from the previous $1.80–$2.00 guidance due to lower projected retail electric sales (mild weather and economic weakness), higher uncollectible expenses, and a higher average share count.
- Segment Outlook:
- Regulated Companies: Projected earnings of $1.80–$1.90 per share (Distribution: $0.90–$1.00; Transmission: $0.90).
- Competitive Businesses: Projected earnings of approximately $0.05 per share.
- NU Parent: Projected net expenses of $0.05 per share.
- Capital Expenditures: Projected 2009 capital expenditures are approximately $970 million, an increase of $50 million from prior projections due to timing of transmission projects.
- Key Risks and Contingencies:
- Pension Funding: Due to negative market returns in 2008, the pension plan funded ratio dropped to approximately 77%. Management estimates a pretax contribution of approximately $50 million will be required in the third quarter of 2010. Future contributions could be substantial.
- Regulatory Matters: Ongoing rate cases in Connecticut, New Hampshire, and Massachusetts. PSNH received approval for temporary rate increases to recover storm costs. CL&P is undergoing a prudency audit regarding a customer service system (C2).
- Environmental: Holyoke Water Power Company (HWP) continues remediation of a manufactured gas plant site; a reserve of $2.5 million remains, with potential for further costs.
- Market Risk: Exposure to commodity price volatility in the remaining wholesale marketing portfolio (Select Energy), though largely hedged. Credit risk related to counterparty defaults is managed via collateral and credit limits.
Important Facts for Investor Verification
- Revenue Drivers: Verify the impact of weather normalization on retail electric sales, which declined 3.8% year-over-year for the six-month period, and the extent to which rate increases offset volume declines.
- Pension Liability: Confirm the assumptions used for the revised $50 million pension contribution estimate and monitor for potential increases in future funding requirements due to interest rate or market changes.
- Regulatory Recoveries: Track the status of the CL&P C2 prudency audit and the PSNH permanent rate case decision expected in mid-2010, as these could impact future earnings.
- Capital Program Execution: Monitor the progress and cost of the New England East-West Solutions (NEEWS) transmission projects, particularly the Greater Springfield Reliability Project, which is estimated to cost $714 million.
- Derivative Valuation: Review the fair value of remaining wholesale derivative contracts (Level 3 assets/liabilities) and the associated credit risk contingent features requiring collateral posting if credit ratings are downgraded.