Business context and reporting period
This unaudited Form 10-Q, filed by Northeast Utilities (NU, before its later Eversource branding) and its utility subsidiaries, covers the quarter and nine months ended September 30, 2014. NU operated regulated electric and natural-gas delivery businesses serving approximately 3.6 million customers in Connecticut, Massachusetts, and New Hampshire. Amounts below are consolidated NU figures unless noted.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $1.893 billion | $1.893 billion | $5.861 billion | $5.523 billion |
| Operating income | $440.9 million | $399.3 million | $1.203 billion | $1.169 billion |
| Net income attributable to controlling interest | $234.6 million | $209.5 million | $597.9 million | $608.6 million |
| Diluted EPS | $0.74 | $0.66 | $1.89 | $1.93 |
| Operating margin | 23.3% | 21.1% | 20.5% | 21.2% |
- For the first nine months, operating cash flow was $1.404 billion, versus $1.177 billion; cash capital investment in property, plant and equipment was $1.117 billion, versus $1.074 billion. Cash flow after that investment was approximately $287 million.
- Cash and equivalents were $41.7 million at September 30, 2014, compared with $43.4 million at December 31, 2013. Total assets were $27.982 billion.
- At September 30, notes payable were $1.047 billion, current long-term debt was $245.6 million, and long-term debt was $8.167 billion. NU’s $1.45 billion commercial-paper program had $964.5 million outstanding and $485.5 million available under its backing facility. NSTAR Electric’s separate $450 million program had $159.5 million outstanding and $290.5 million available.
- Common dividends paid in the first nine months totaled $356.1 million; the declared dividend was $0.39 per share for Q3.
Changes versus the prior comparable period
- Q3 controlling-interest earnings rose 12.0%, while nine-month earnings declined 1.8%. Q3 revenue was essentially unchanged; nine-month revenue increased 6.1%, largely reflecting higher energy supply costs passed through to customers rather than equivalent earnings growth.
- Q3 earnings benefited from lower operations and maintenance expense and the absence of the prior-year FERC ROE reserve. Nine-month results were weighed down by a $32.1 million after-tax charge for 2014 FERC ROE orders, compared with a $14.3 million after-tax reserve in Q3 2013.
- Electric retail sales volumes fell 4.5% in Q3 and 1.2% for the nine months, reflecting cooler summer weather and conservation. Firm natural-gas volumes increased 10.5% for the nine months, mainly due to the colder first quarter and customer growth.
- Operating cash flow improved, aided by DOE litigation receipts, the absence of major storm-restoration cash disbursements, and lower pension and PBOP contributions. The improvement was partly offset by working-capital timing and higher income-tax payments.
Outlook, commentary, risks and unusual items
- The filing gives no consolidated earnings or EPS guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- FERC’s October 16, 2014 post-quarter order confirmed a 10.57% transmission base ROE and an 11.74% cap on total ROE, and ordered refunds for the first complaint period. NU was evaluating the impact on existing reserves. The second complaint remained for trial, and the outcome of a third complaint was uncertain. NU had $76.1 million in cumulative pre-tax reserves for the first and second complaints at September 30.
- CL&P’s requested annual distribution-rate increase was revised to $221 million, with a decision expected in December 2014. PSNH faced a state proceeding on possible divestiture of generation assets and a pending prudence decision on its Clean Air Project scrubber; management said it expected prudent costs to be recoverable.
- NU and Spectra Energy announced Access Northeast, a proposed pipeline expansion with an estimated $3 billion cost, equal ownership, FERC approval required, and anticipated service in November 2018. Northern Pass was estimated at $1.4 billion, with permitting pending and service then expected in the second half of 2018.
- NU received $132.1 million net from DOE spent-nuclear-fuel damages in the first nine months; proceeds were distributed for customers’ benefit, with refunds beginning in Q3. The filing also recorded an $11.3 million net reduction in income-tax expense from state-credit updates. Q3 and nine-month results included $3.0 million and $13.4 million, respectively, of after-tax merger-integration costs.
- Key risks include regulatory outcomes and cost recovery, weather and energy costs, capital-market access and interest rates, environmental obligations, and execution and permitting of major infrastructure projects. Management reported disclosure controls effective; a new general-ledger system went live August 1, 2014, representing a material change in internal controls, with implementation reviews and testing described.
Important facts for investors to verify
- How the final FERC ROE refund and prospective-rate determinations affect transmission revenue, reserves, and future earnings.
- Whether requested rate increases and the costs of PSNH’s Clean Air Project and generation assets receive regulatory approval and recovery.
- Whether operating cash flow remains sufficient to fund capital investment, dividends, and debt service, given the relatively low reported cash balance and reliance on short-term borrowing.
- Progress, final cost, regulatory approvals, and financing for Access Northeast, Northern Pass, and planned transmission investments.
- How much of reported revenue growth reflects pass-through energy costs, and whether weather-normalized demand and conservation trends affect underlying earnings.