Northeast Utilities (NU) reported second quarter 2011 earnings of 44 cents per share, shy of the Zacks Consensus Estimate of 48 cents.
On a GAAP basis, however, the company’s EPS of 44 cents was above last year’s 41 cents, rising mainly due to the company’s cost containment efforts and the impact of the recent electric distribution rate case decisions.
Net revenues of $1.05 billion in the quarter were down 5.4% from $1.11 billion in the prior-year quarter. Revenues also lagged the Zacks Consensus Estimate of $1.15 billion.
Electric Sales Volumes and Expenses
Northeast Utilities' retail electric sales were down 1.3% from the comparative 2010 quarter to 7,966 Giga watt hours (GWh), due in part to cooler weather in late May and June 2011. On a weather-adjusted basis, electric sales decreased 0.9% in the quarter. Yankee Gas' natural gas sales increased 22.2% to 8.5 billion cubic feet (Bcf). On a weather-adjusted basis, Yankee Gas sales showed an increase of 14.7% year over year.
On the cost side, Northeast Utilities’ results continued to be impressive given the company’s continued cost control measures. Total operating expense decreased 6.8% year over year to $869.3 million in the quarter. Lower fuel and power cost coupled with lower depreciation costs led to the decline, offset by a rise in maintenance and other operating expenses.
Despite the decline in revenue and only a slight decline in costs, Northeast Utilities’ operating income dipped only marginally to $178.1 million from $178.3 million in the prior-year quarter.
Segment Earnings
Distribution & Generation: Earnings at the segment, comprising Electric and Gas Distribution earnings, totaled $40.3 million in the quarter, 48.7% higher than the year-ago earnings of $27.1 million. The increase was driven by better control of operating expenses and electric distribution rate increases, offset in part by lower electric sales and higher pension and health care costs.
Transmission: The Transmission segment’s quarterly earnings of $42.2 million, higher than $41.9 million earned in the prior-year quarter, reflected a higher level of transmission investment.
NU Parent & Other Companies: The segment recorded net expenses of $5.2 million in the quarter compared with earnings of $2.9 million in the prior-year quarter.
Financial Update
As of June 30, 2011, Northeast Utilities had cash and cash equivalents of $15.1 million compared to $23.4 million as of December 31, 2010.
Cash generated from operations in the first half of 2011 was $686.7 million, higher than $533.8 million in first half of 2010. Capital expenditure increased to $468.5 million for the quarter, up from $442.4 million spent in the comparable period last year.
Guidance
Northeast Utilities has raised the lower end of its earnings guidance for 2011 based on its revised guidance for the distribution and generation segment. The company now expects 2011 earnings, excluding merger related expenses, to come within the $2.30 to $2.40 per share range compared to $2.25 to $2.40 projected earlier. Including merger expenses, Northeast Utilities now projects earnings of $2.10 to $2.20.
Northeast Utilities’ guidance for 2011 reflects earnings at the Distribution & Generation segment of $1.30−$1.35 per share, compared to $1.25–$1.35 expected earlier.
For the Transmission segment, the company retained its 2011 earnings guidance of $1.05−$1.10 per share. Earnings at the NU parent and other companies are expected to record net expenses of $0.05 per share in 2011.
Our View
Going forward, we expect New England's largest utility company, Northeast Utilities, to gain from its continued cost control efforts and increased rates. The company is also poised to benefit from combined operations with NSTAR, which should boost the company’s bottom line.
Northeast Utilities’ closest peer NiSource Inc. (NI) had a mixed quarter, with its top line falling short of our expectation and earnings beating the estimate. The company posted second quarter 2011 net operating earnings of 17 cents per share, surpassing the Zacks Consensus Estimate of 14 cents as well as the year-ago results of 13 cents.
We maintain a Neutral recommendation on Northeast Utilities over the long term, supported by a short-term Zacks #3 Rank (Hold rating).
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