Business context and reporting period
This is Northeast Utilities’ (NU) Form 10-K for the fiscal year ended December 31, 2013—not a standalone fourth-quarter report. NU was a regulated New England energy-delivery holding company with electric distribution and transmission, natural-gas distribution, and limited generation operations. The filing also covers CL&P, NSTAR Electric, PSNH and WMECO. NU’s 2012 comparison includes NSTAR only from the April 10, 2012 merger date, so year-over-year consolidated comparisons are not fully comparable.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $7.301 billion | $6.274 billion |
| Operating income | $1.529 billion | $1.118 billion |
| Net income attributable to controlling interest | $786.0 million | $525.9 million |
| Diluted EPS | $2.49 | $1.89 |
| Operating cash flow | $1.664 billion reported | $1.161 billion reported |
| Cash and cash equivalents at year-end | $43.4 million | $45.7 million |
Reported revenue increased 16.4% and operating income increased 36.8%. Operating margin was approximately 21.0%, versus 17.8% in 2012. Management attributed earnings growth primarily to the merger contribution, lower operating and maintenance costs, increased sales and transmission investment, partly offset by higher depreciation and property taxes and a regulatory reserve. Excluding after-tax merger and integration costs, management reported earnings of $799.8 million, or $2.53 per share, compared with $633.5 million, or $2.28 per share, in 2012. These are non-GAAP measures.
Cash flow from operations was $1.58 billion on management’s basis net of rate-reduction-bond (RRB) payments. The improvement reflected the NSTAR contribution, lower storm-restoration cash outlays and the absence of certain 2012 customer credits and merger costs; increased pension contributions were a partial offset. Cash investment in property, plant and equipment was $1.457 billion; total capital expenditures including additional non-cash items were approximately $1.6 billion.
At year-end, NU reported $7.777 billion of long-term debt and $1.093 billion of notes payable; $533.3 million of long-term debt was classified as current. About 91% of long-term debt was fixed-rate. Current liabilities exceeded current assets by approximately $1.2 billion at NU; management cited construction spending, debt maturities and the timing of regulated cost recovery. The company reported $501.7 million of debt due within 12 months and approximately $1.01 billion outstanding under its commercial-paper program, with $435.5 million of remaining program capacity. It stated that it expected operating cash flow and capital-market access to cover requirements and remained within its debt-to-capitalization covenant.
NU’s capital structure was approximately 53% equity and 46% long-term debt. It paid $462.7 million in common dividends in 2013 and declared $1.47 per share for the year. Management projected 2014 EPS of $2.60–$2.75 and approximately $7.6 billion of capital expenditures for 2014–2017, including about $3.7 billion for transmission.
Material changes versus the prior comparable period
- Consolidated earnings and revenue rose substantially, but the comparison is affected by the full-year inclusion of NSTAR in 2013 versus its partial-year inclusion in 2012.
- Reported operating cash flow increased; management’s net-of-RRB measure rose from $1.05 billion to $1.58 billion. Cash capital investment remained substantial.
- NU issued $1.68 billion of long-term debt and retired approximately $930 million of existing long-term debt and pollution-control bonds. NSTAR Electric, PSNH and WMECO completed repayment of their RRBs during 2013.
- GSRP, NU’s largest NEEWS transmission project, entered service ahead of schedule at a final cost of $676 million, $42 million below estimate.
- Retail electric sales increased 1.0% and firm natural-gas sales increased 12.3%; colder winter weather was a major factor. Weather-normalized consolidated electric sales were relatively unchanged, while weather-normalized gas sales increased 0.9%.
Outlook, risks, contingencies and unusual items
- Regulatory ROE proceeding: A FERC administrative law judge recommended transmission base returns on equity of 10.6% for the October 2011–December 2012 refund period and 9.7% prospectively, versus the existing 11.14% base rate. NU recorded a $14.3 million after-tax reserve in 2013. FERC’s final decision and a separate complaint seeking additional refunds remained unresolved.
- Storm recovery: A February 2014 PURA draft decision approved $365 million of CL&P storm costs for recovery over six years beginning December 2014; a final decision was pending. The DPU approved recovery of $34.2 million of NSTAR Electric’s $38 million request over five years. NU reported $593 million of storm costs deferred for recovery across its electric utilities at year-end.
- PSNH generation and environmental exposure: The $421 million Merrimack Station Clean Air Project remained subject to a prudence review. PSNH also faced regulatory review of its generation ownership and default-service rates; its generation rate base was approximately $760 million. A draft Merrimack water permit could require a closed-cycle cooling system with an estimated net-present-value cost of about $112 million; the final permit and resulting cost were uncertain.
- Major projects and spending: Northern Pass was estimated at $1.4 billion and depended on federal and state permits. The four-year capital program is large relative to cash on hand and relies on regulatory recovery and access to financing. The company also cited project siting, construction, cost-allocation and transmission-return risks.
- Other material exposures: Environmental remediation liabilities were $35.4 million, primarily related to former manufactured-gas plants; management said most MGP costs were recoverable through rates. Goodwill was $3.5 billion, including $3.2 billion from the NSTAR merger; the 2013 impairment test found no impairment. Pension funding, severe weather, customer migration from PSNH’s default service, regulatory decisions, cybersecurity and the realization of merger benefits were identified risks.
- Unusual items and accounting: The company recorded $13.8 million of after-tax 2013 integration costs and the $14.3 million after-tax FERC reserve. A Massachusetts tax-rate change required approximately $61 million of additional deferred tax liability, offset by a regulatory asset. Management reported effective internal controls; the auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Track the final FERC transmission ROE decision, the potential refund exposure and any effect on future transmission earnings.
- Confirm final regulatory treatment and timing of CL&P storm-cost recovery, and monitor recovery of the other deferred storm balances.
- Follow the PSNH Clean Air Project prudence case, the Merrimack water-permit process and the generation-ownership review, including implications for rate recovery.
- Assess liquidity and refinancing needs against the current-liability deficit, $501.7 million of near-term maturities, commercial-paper usage and the multiyear capital program.
- Separate merger-driven growth from underlying performance when evaluating comparisons with 2012; review both GAAP results and management’s non-GAAP reconciliation.
- Monitor Northern Pass permitting, project cost and schedule, and the recoverability and returns on planned transmission investment.