01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU) closed 2008 with net income of $260.8 milliona, or $1.67 per fully diluted share, up from $246.5 million ($1.59) in 2007.
Results included an after-tax $29.8 millionb ($0.19 per share) charge to settle the Con Edison merger litigation; excluding it, earnings were $290.6 million ($1.86 per share). The regulated companies (CL&P, PSNH, WMECO and Yankee Gas) generated about 99.5% of earnings, with the transmission segment ($138.3 million) now rivaling the distribution segment ($150.8 million). Growth is driven by a roughly $1.3 billion annual capital program, with transmission rate base projected to rise from about $2.4 billion to about $5.0 billion by 2013, and total regulated capital investment of up to about $7 billion over 2009-2013.
The filing also highlights meaningful near-term headwinds. Management guides 2009 EPS to $1.80c-$2.00, reflecting lower weather-normalized electric sales (about 1% decline), higher pension and uncollectible expense, and an expected equity issuance of $250-$300 million in mid-2009. Pension assets fell about $900 million in 2008 to $1.56 billion (76% funded), which will require an estimated $150 million contribution in 2010.
NU also cut its dividend payout policy: the February 2009 quarterly dividend rose to $0.2375d per share, a target payout of about 50% of earnings. Balance sheet risk is mainly financing-related: total debt of about $4.8 billion, Baa2/BBB-/BBB senior unsecured ratings with stable outlooks, and a credit facility whose available capacity was reduced by the Lehman Brothers Commercial Bank default.
Large project risk is concentrated in the New England East-West Solutions (NEEWS) program, with an estimated $1.49 billion NU share through 2013, and the proposed 1,200 MW Hydro-Quebec transmission line (roughly $525 million NU share). Regulatory exposure also includes PSNH's $457 million Merrimack scrubber project, now under New Hampshire Supreme Court appeal, and the December 2008 ice storm (about $100 million of system damage, with $62.7 million charged to a PSNH storm reserve).
02—Key points
Key Highlights
- 2008 GAAP EPS of $1.67 (net income $260.8M) vs. $1.59 in 2007; adjusted EPS of $1.86 excluding the $29.8M after-tax Con Edison litigation settlement charge.
- Transmission segment earnings rose to $138.3M in 2008 from $82.5M in 2007, driven by the southwest Connecticut transmission build-out and a FERC base ROE of 11.14%; transmission rate base is projected to reach about $5.0B by 2013.
- 2009 EPS guidance of $1.80-$2.00, assuming $250-$300M of mid-2009 equity issuance, weaker electric sales (about -1%), and roughly $0.10 per share of higher pension cost.
- Dividend raised to $0.2375 per quarter (annualized $0.95, up 11.8%), with a new policy targeting roughly 50% payout of earnings.
- Pension plan funded ratio fell to 76% after a roughly $900M asset decline in 2008; an estimated $150M required contribution is expected in 2010.
- Capital plan of about $6.9B (2009-2013) for the regulated companies, including the $1.49B NEEWS transmission program and a roughly $525M share of the proposed Hydro-Quebec tie line.
- Credit facilities total $900M, but Lehman Brothers Commercial Bank's default reduces usable capacity to about $845M; senior unsecured ratings are Baa2/BBB-/BBB with stable outlooks.
03—Questions
Frequently Asked Questions
What drove NU's 2008 earnings, and how much was one-time?
Net income rose 6% to $260.8M ($1.67 per diluted share). The result included a one-time $29.8M after-tax charge ($0.19 per share) to settle the Con Edison merger litigation, so underlying earnings were about $290.6M ($1.86 per share). Growth came mainly from higher transmission earnings, partly offset by lower distribution earnings, including the effects of the $5.8M CL&P procurement fee refund and higher operating costs.
What does the 2009 outlook imply for investors?
Management guides 2009 EPS to $1.80-$2.00, below the adjusted 2008 level of $1.86 at the midpoint, reflecting lower sales, higher pension and uncollectible expense, and dilution from $250-$300M of planned equity issuance in mid-2009. Guidance is based on distribution EPS of $1.00-$1.10 and transmission EPS of $0.85-$0.90.
How exposed is NU to financing and credit market conditions?
Total debt was about $4.8B at year-end 2008, and the company relies on short-term borrowings and capital markets to fund a large construction program. NU's senior unsecured ratings are investment grade (Baa2/BBB-/BBB, stable). Lehman Brothers Commercial Bank's bankruptcy reduces credit facility availability, and management plans roughly $400-$450M of external financing in 2009, including $250M of CL&P bonds issued in February 2009 at 5.5%.
What are the main project and regulatory risks?
Key risks include NEEWS siting and cost approvals (estimated $1.49B NU share), the Hydro-Quebec tie line requiring FERC and state approvals, PSNH's $457M Merrimack scrubber project subject to a New Hampshire Supreme Court appeal and future prudence reviews, and FERC rehearing and appeals on transmission ROE incentives. Incremental cost overruns or delayed recovery would pressure earnings growth, which management targets at 8-11% annually through 2013 (likely the lower end given current conditions).
How did the December 2008 ice storm affect the company?
The storm caused roughly $100M of damage across PSNH, WMECO and CL&P systems, with PSNH the hardest hit (about 322,000 customers out). Of the estimated $75M PSNH repair cost, $62.7M was charged to the Major Storm Costs Reserve for future recovery, and WMECO deferred $11.3M of its $13.8M estimated costs. Management stated none of the companies had a material impact on 2008 results, but PSNH expects about $10M of additional costs in 2009 and cash outflows in the first half of 2009 before recovery begins.
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