Eversource Energy (Northeast Utilities) — 2010 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2010, filed jointly by Northeast Utilities (NU) and its utility subsidiaries CL&P, PSNH and WMECO. NU’s regulated electric and gas distribution and transmission businesses generated approximately 99% of 2010 earnings. The filing also discusses the proposed merger with NSTAR, announced in October 2010; it was pending shareholder and regulatory approvals when the report was filed.
Financial results and liquidity
| NU consolidated metric | 2010 | 2009 | Change |
|---|---|---|---|
| Operating revenues | $4.898 billion | $5.439 billion | Down 9.9% |
| Operating income | $799.9 million | $751.4 million | Up 6.5% |
| Net income attributable to controlling interests | $387.9 million | $330.0 million | Up 17.5% |
| Diluted EPS | $2.19 | $1.91 | Up 14.7% |
| Cash from operating activities, as reported | $1.093 billion | $989.1 million | Up |
| Cash from operating activities, net of rate reduction bond payments | $832.6 million | $745.0 million | Up |
| Cash capital expenditures | $954.5 million | $908.1 million | Up |
Margins and earnings mix. Operating margin was approximately 16.3% versus 13.8% in 2009; net margin was approximately 7.9% versus 6.1%. Regulated companies earned $384.0 million, including $206.2 million from distribution and $177.8 million from transmission. Competitive businesses earned $8.3 million, down from $15.8 million.
Balance sheet and liquidity. At year-end, total assets were $14.522 billion, cash and cash equivalents were $23.4 million, and total capitalization was $8.562 billion. Long-term debt was $4.699 billion, including current maturities; rate reduction bonds were $181.6 million, and bank notes payable were $267.0 million. NU reported $600.9 million of aggregate availability under its revolving credit facilities. Its debt-to-capitalization covenant limit was 65%; the company said it was in compliance. The filing does not provide a consolidated current ratio in the text supplied.
NU declared dividends of $1.03 per share for 2010 and announced a $0.275 quarterly dividend in February 2011, equivalent to $1.10 annualized. The announced dividend increase is distinct from the conditional, post-merger dividend expectation.
Fourth-quarter snapshot
For Q4 2010, NU reported operating revenues of $1.204 billion, operating income of $195.3 million, net income attributable to controlling interests of $129.3 million and EPS of $0.73. Q4 2009 figures were $1.315 billion, $192.4 million, $84.7 million and $0.48, respectively.
Changes versus the prior period
- Annual revenue fell despite higher earnings. The main revenue decline reflected lower energy supply and other pass-through charges that generally do not affect earnings; lower fuel and purchased-power costs also reduced reported revenue and expense.
- Operating income and EPS improved, aided by CL&P and PSNH distribution rate decisions, increased transmission investment and earnings, cost management, lower uncollectibles expense, and weather-related increases in actual electric sales.
- Actual retail electric sales increased 1.7%, but weather-normalized sales declined 1.7%, which management attributed partly to conservation and the weak economy. Firm natural gas sales rose 1.9% actual and 6.2% weather-normalized.
- Reported 2010 earnings included a $15.7 million after-tax nonrecurring tax-settlement benefit and a $9.4 million after-tax merger-cost charge. Excluding these items, management reported non-GAAP earnings of $381.6 million, or $2.16 per share.
- Pension expense increased substantially: NU’s pretax pension expense was $80.4 million versus $39.7 million in 2009. NU contributed $45 million to its pension plan in 2010 and expected to contribute approximately $145 million in 2011.
Outlook, risks and contingencies
- Guidance: Management projected 2011 GAAP EPS of $2.10–$2.25, including approximately $0.15 per share of expected merger costs; excluding those costs, projected EPS was $2.25–$2.40. It forecast 6%–9% compound annual EPS growth through 2015 from a 2009 EPS base of $1.91, with growth toward the upper end if the NSTAR merger closed. These were stand-alone projections and were subject to assumptions and regulatory outcomes.
- Investment program: Planned 2011–2015 capital expenditures were approximately $6.6 billion, with 2011 at approximately $1.2 billion. NU forecast regulated rate base growth from $7.3 billion at year-end 2010 to $11.4 billion by year-end 2015, excluding merger effects. Forecasts depended on project execution and timely approvals.
- Merger: The proposed all-stock merger provided for 1.312 NU shares per NSTAR share. Completion required shareholder and regulatory approvals; litigation by NSTAR shareholders and questions about Connecticut jurisdiction were outstanding. NU disclosed a possible $135 million termination fee plus up to $35 million of specified NSTAR expenses in certain termination circumstances.
- Major projects: PSNH’s Merrimack Clean Air Project was approximately 80% complete and estimated at $430 million, with completion expected by mid-2012. Its cost recovery was subject to regulatory review and legal challenges. NEEWS transmission projects and Northern Pass involved significant planned investment, permitting and siting risks; Northern Pass’s estimated total cost was approximately $1.1 billion.
- Other exposures: NU recorded $37.1 million of environmental remediation reserves for 58 sites; management cautioned that costs could be higher as investigations progress. The DOE spent-fuel litigation had trial-court awards to the Yankee Companies, but appeals remained pending; any ultimate recovery was expected to benefit customers. NU also identified environmental regulation, severe weather, pension funding, customer affordability, PSNH customer migration and regulatory cost recovery as risks.
- Tax and cash flow: The 2010 Tax Act was expected to provide cash-flow benefits of about $250 million in 2011 and $450 million–$550 million over 2011–2013. Management projected 2011 operating cash flow, net of rate reduction bond payments, of $950 million–$1 billion, partly offset by planned pension contributions.
Important facts for investors to verify
- Confirm reported GAAP results against the audited financial statements and distinguish recurring earnings from the tax-settlement benefit and merger costs.
- Track NSTAR merger approvals, litigation, closing conditions, potential termination payments and any changes to dividend or financing plans.
- Monitor 2011 EPS and cash-flow guidance against rate-case outcomes, weather-normalized demand, pension contributions and merger expenses.
- Verify planned capital spending, project schedules and cost estimates, especially NEEWS, Northern Pass and the Merrimack Clean Air Project, together with their regulatory recovery status.
- Review debt, revolver availability, rating outlooks, refinancing needs and the company’s ability to fund its investment program while maintaining dividends.
- Assess developments in environmental remediation estimates and DOE spent-fuel litigation; ultimate costs, timing and recoveries were uncertain.