Northeast Utilities' EPS Outperforms - Analyst Blog

Northeast Utilities' (NU) fourth quarter 2010 earnings of 73 cents per share beat the Zacks Consensus Estimate of 64 cents by 9 cents. Results were also above 48 cents in the prior-year quarter. Net income in the quarter was $129.3 million, up 53% from $84.7 million in the prior-year quarter.

For full-year 2010 the company earned $2.19 per share, surpassing the Zacks Consensus Estimate of $2.11 and the prior-year earnings of $1.91. Annual net income increased 17.5% from 2009 levels to $387.9 million.

Net revenues of $1.2 billion in the quarter were down 7.7% from $1.3 billion in the prior-year quarter. Results also lagged the Zacks Consensus Estimate of $1.8 billion. Revenue for the full-year came in at $4.9 billion, below the Zacks Consensus Estimate of $5.5 billion and the year-ago revenue of $5.4 billion.

Electric Sales Volumes and Expenses

Northeast Utilities' retail electric sales declined marginally from the comparative 2009 quarter to 8,268 Giga watt hours (GWh). On a weather-adjusted basis, electric sales decreased 0.5% in the quarter. Yankee Gas' natural gas sales increased 9.1% to 13.8 billion cubic feet (Bcf). On a weather-adjusted basis, Yankee Gas sales increased 6.3% year over year.

Full-year electric sales volumes were up 1.7% from 2009 levels to 34.2 terawatt hour (TWh), with volumes declining 1.7% on a weather-adjusted basis. Yankee Gas' natural gas sales for the year increased 1.9% to 42.3 billion cubic feet (Bcf), while weather-adjusted sales were up 6.2%.

Total operating expense decreased 10.2% year over year to $1 billion in the quarter, while full-year costs came down 12.8% to $4.1 billion. Lower fuel and power cost coupled with lower maintenance and depreciation costs led to the decline in both periods.

In the fourth quarter, operating income increased 1.5% to $195.3 million from the prior-year quarter. Operating income for 2010 totaled $799.9 million, up 6.5% from 2009.

Segment Earnings

Distribution & Generation:  Earnings at the segment, comprising Electric and Gas Distribution earnings, totaled $75.5 million in the quarter, much higher than the year-ago earnings of $39.2 million. Full-year segment earnings also grew 29.5% from the year-ago levels to $206.2 million.

Transmission: The Transmission segment's quarterly earnings of $50.5 million, higher than $44.4 million earnings reported in the prior-year quarter, reflected continued investment in transmission facilities. Driven by these investments, the segment earnings for the year also showed an 8.2% growth reaching $177.8 million.

Competitive Businesses: The segment, which comprises NU Enterprises Inc. ("NUEI"), earned $0.6 million in the quarter, down from $4.2 million in the prior-year quarter. NUEI earned $8.3 million for all of 2010, compared with earnings of $15.8 million for all of 2009.

The lower results reflect the reduced scale of NUEI's wholesale marketing business, whose remaining contracts expire over the next three years, and lower gains from marking the remaining wholesale obligations of NUEI to market.

NU Parent & Other Companies:  The segment earned $2.7 million in the quarter compared with net expenses of $3.1 million in the prior-year quarter. For the year, the segment recorded net expenses of $4.4 million compared with net expenses of $9.3 million for full-year 2009.

Financial Update

Northeast Utilities ended 2010 with cash and cash equivalents of $23.4 million, higher than $27.0 million at the end of 2009. Long-term debt at year-end 2010 totaled $4.6 billion, higher than $4.5 billion as of December 31, 2009.

Cash generated from operations in 2010 was $1.1 billion, lower than $989.1 million in 2009. Capital expenditure increased to $954.5 million for the year, up from $902.5 million spent in 2009.

In October 2010, Northeast Utilities agreed to merge with NSTAR (NST), an electric and natural gas distribution company, in a stock-for-stock deal.  The merger will create one of the largest U.S. utility companies, with an enterprise value of $17.5 billion. The companies expect to close the merger transaction in the second half of 2011.

Guidance

Although the Northeast Utilities expects its merger with NSTAR to influence its 2011 results, the company provided a stand-alone 2011 guidance to assist investors in evaluating the company's near-term financial expectations.

Northeast Utilities expects earnings in 2011 to be in the range of $2.25 to $2.40 per share, excluding nearly $0.15 per share of expenses related to the completion of merger.

The guidance reflects its Distribution & Generation segment earnings of $1.25−$1.35 per share and Transmission segment earnings of $1.05−$1.10 per share. Earnings at the NU parent and other companies, including NU's Competitive Business segment, is expected to record net expenses of $0.05 per share in 2011, excluding the merger-related costs.

Our View

Going forward, we expect New England-based Northeast Utilities to gain from the operation of a larger locally controlled energy company. Following the merger, the two companies plan to invest about $9 billion in New England's energy infrastructure over the next five years.

We maintain a Neutral recommendation on Northeast Utilities over the long term. The company retains a short term Zacks #3 Rank (Hold).