Northeast Utilities (NYSE:NU) continues to believe that FERC’s decision in the New England base return on equity (ROE) proceeding will be viewed widely as an important statement on efforts to promote transmission development across the United States, according to James Judge, Northeast Utilities executive vice president and CFO.
“We and others in the industry believe that a significant reduction in the ROE for new New England’s transmission owners would have a chilling effect on transmission investment throughout the country and would run counter to FERC’s very successful policy since 2005 of encouraging transmission investment as a means to make the grid more reliable and secure,” he said during the company’s 2Q13 earnings webcast on July 30.
Hearings were held in May, initial briefs were filed on June 6 and final briefs were filed on June 28. An initial decision is expected to be made by the administrative law judge by Sept. 10, and a final FERC decision is expected in mid-to-late 2014.
In making its decision, FERC will take into account any changes in bond yields, he said, noting that when the current New England transmission ROE was set about five years ago, FERC increased the ROE from 10.4% to the current 11.14% due to the increase in bond yields during its period of reconsideration.
“[L]ong-term interest rates have moved nearly 100 basis points higher in recent months furthering support of ourposition that the base ROE should not be adjusted at all,” he said.
‘Solid results exceeded Wall Street’s expectations’
Judge noted that the company’s 2Q13 “solid results exceeded Wall Street’s expectations and were driven by” an increase in transmission investment return, a decline in O&M costs and higher electric and natural gas sales.
The company also benefited from colder temperatures earlier in the period and warmer weather later in the quarter compared to last year.
Judge further noted that the number of days when the temperature that hit 90 degrees or higher in Boston this month was double that of last year and a new single day record was set in Boston on July 19 of 99 degrees.
Although total electric sales increased for the quarter a modest 0.6%, the company did see a 1.8% increase in the residential electric sales, which is its largest sector, compared with 2Q12. Sales for the company’s gas operations increased 13% in 2Q13 with the strongest component being the residential sector.
In addition to higher sales, Judge said that 2Q13 revenues benefited from two distribution rate increases that took effect in mid-2012. Yankee Gas and Public Service of New Hampshire (PSNH) each benefited from a $7m annualized distribution rate increase.
Another positive driver in the quarter was the continued investment in Northeast Utilities’ transmission business, he said, noting that transmission earnings totaled $76.8m in 2Q13, compared with $63.7m in 2Q12, adding about 4 cents per share.
Judge also noted that there are continued signs of improvement in the local economy, particularly in the local labor and housing markets.
For instance, the unemployment rate in Connecticut has improved, dropping to 8% from 8.3% at year-end. Similarly, New Hampshire’s unemployment rate has improved to 5.3% versus 5.7% at year-end 2012, he added.
State regulatory actions
On rate actions, he noted that New Hampshire state regulators authorized in June a $12.6m distribution rate increase for PSNH that became effective on July 1 and included $7.7m related to plant investment.
The company also implemented a couple of rate decreases for its customers, he said, adding that the stranded cost recovery charge was reduced by 83% due to the final maturity of rate reduction bonds. The energy service charge also declined 10% due to current market conditions.
Judge also noted that in a separate proceeding in June, state Public Utilities Commission (PUC) staff issued a report related to a review that was announced in January involving a review into the market conditions affecting PSNH’s default service. The report recommended that the PUC open a proceeding to examine several possible solutions to PSNH’s default service rates in the context of competitive retail markets and in connection with this, to explore various alternatives related to the company’s generation assets.
Judge added that the company will participate in the process openly and transparently.
He also noted recently enacted legislation in Connecticut related to the state’s energy strategy.
Connecticut Gov. Dannel Malloy has signed into law two energy bills, including one that seeks to increase the state’s gas penetration rate as well as require the state Public Utilities Regulatory Authority (PURA) to implement decoupling to Connecticut’s electric and natural gas utilities in the next rate case.
The second bill allows the state Department of Energy and Environmental Protection (DEEP) to conduct a process to procure additional renewable energy from generators under long-term contracts with the electric distribution companies to help the state meet its renewable portfolio standard (RPS).
If Connecticut experiences a material shortfall in reaching its RPS, large-scale hydropower, under certain conditions, can be used to alleviate the shortfall up to 5% of the RPS requirements in 2020, he added.
Judge also commented on the status of the company’s storm cost proceedings.
Primarily as a result of the four major storms that New England experienced between August 2011 and February 2013, “we have more than $600m of deferred storm costs that we need to recover from our 3 million electric customers,” he said.
In June, the PURA issued a procedural order saying it would review Connecticut Light and Power’s (CL&P) storm recovery request. The review, he added, would involve the accuracy of the cost, the eligibility for recovery and the prudence of the cost. PURA is expected to issue a decision by December.
Storm recoveries will not begin for CL&P until December 2014 and will be spread over six years per the Connecticut merger settlement agreement involving NSTAR.
NSTAR Electric filed a request in March to recover about $35m of restoration costs from the 2011 storms, he said, adding that through the Massachusetts merger settlement agreement, prudently incurred costs will be recovered over a five-year period beginning Jan. 1, 2014. Hearings are due to begin in August.
“We expect to file later this quarter with the Massachusetts commission for recovery of 2012 and 2013 storm costs,” he said.
PSNH was able to increase its major storm recovery collections in New Hampshire by $5m to $12m per year, and if no new major storms occur, the company expects to fully recover its deferred storm costs by mid-2015.
Also, Western Massachusetts Electric is seeking recovery of storm costs through its typical storm recovery mechanism, he said.
Northeast Utilities on July 29 reported earnings of $171m, or 54 cents per share, in 2Q13, compared with earnings of $44.3m, or 15 cents per share, in 2Q12. The company also said that 2Q12 results included approximately $91.5m, or 30 cents per share, of after-tax charges related to the April 10, 2012 closing of the merger between Northeast Utilities and NSTAR and related merger and regulatory settlement agreements.
In the first half of 2013, Northeast Utilities earned $399.1m, or $1.26 per share, compared with earnings of $143.6m, or 60 cents per share, in the first half of 2012. Excluding merger and related settlement costs of $92.6m, or 38 cents per share, Northeast Utilities earned $236.2m, or 98 cents per share, in the first half of 2012, the company added.