We recently initiated coverage on Northeast Utilities (NU) with a Neutral recommendation and a target price of $28.
First-quarter Results
The company reported a first quarter 2010 EPS of $0.49, below the Zacks Consensus Estimate of $0.54 and last year’s earnings of $0.60. Earnings per share in the quarter were impacted by lower electric and natural gas sales, reduced earnings at NU’s competitive businesses, and higher employee benefit costs. Revenues came in at $1.3 billion, a decline of 16% from the year-ago period.
NU’s Guidance Reaffirmed
Despite weak results in the quarter, the company reiterated its full-year 2010 earnings guidance of $1.80 to $2.00 per share. The guidance reflects its regulated Electric and Natural Gas Distribution and Electric Generation segment earnings of $0.95 – $1.05, Transmission segment earnings of $0.90 – $0.95, Competitive Business segment earnings of $0.00 – $0.05 and NU Parent and other expenses of approximately $0.05 per share.
Future Prospects
We are pleased to note that the company continues to progress well on its major transmission projects – the New England East West Solution (NEEWS) and the Hydro-Quebec transmission project (Northern Pass), with in-service dates scheduled for 2014 and 2015, respectively. We believe these investments will provide attractive earnings and cash flow growth for NU for the next several years, without the need for any further incremental transmission growth opportunities in the region.
Furthermore, we expect NU to grow its regulated earnings in the future, resulting from improved base rates at its operating utilities. Recently, NU’s Connecticut and New Hampshire utilities received draft decisions approving rate increases of $98.8 million and $45.5 million, respectively. Final decisions on these cases are to be received shortly. The two rate increases together are expected to positively impact NU’s earnings for the rest of 2010.
Financially, the company’s balance sheet remains strong with cash and cash equivalents of $30 million and available borrowing capacity of $694.1 million as on March 31, 2010. Additionally, the company increased its dividend by 7.9% to an annual rate of $1.025 per share, currently yielding a competitive 3.9%. A series of regular dividend hikes is a strong signal to the market that cash flow can sustain the dividend payout.
We believe NU shares offer a strong long-term growth potential given its new transmission project backlog such as the NEEWS and the HQ lines and expectations of reasonable resolutions at the pending rate cases.
Neutral Recommendation
Going forward, positive factors offering valuation upside include stable, regulated electric and natural gas operations, expected rate increases, and sufficient cash flow to produce a record of dividend increases. We project a 6% to 9% annual earnings growth in the foreseeable future.
However, there remains uncertainty over the outcomes of the regulatory rate cases and potential delays in regulated transmission projects. Such delays and uncertainties could weigh on the performance of the stock.
Furthermore, we believe the synergies of the transmission projects are already factored in the company’s valuation. This leaves little room for upside, thus, guiding us to hold our Neutral view on the stock.
First-quarter Results
The company reported a first quarter 2010 EPS of $0.49, below the Zacks Consensus Estimate of $0.54 and last year’s earnings of $0.60. Earnings per share in the quarter were impacted by lower electric and natural gas sales, reduced earnings at NU’s competitive businesses, and higher employee benefit costs. Revenues came in at $1.3 billion, a decline of 16% from the year-ago period.
NU’s Guidance Reaffirmed
Despite weak results in the quarter, the company reiterated its full-year 2010 earnings guidance of $1.80 to $2.00 per share. The guidance reflects its regulated Electric and Natural Gas Distribution and Electric Generation segment earnings of $0.95 – $1.05, Transmission segment earnings of $0.90 – $0.95, Competitive Business segment earnings of $0.00 – $0.05 and NU Parent and other expenses of approximately $0.05 per share.
Future Prospects
We are pleased to note that the company continues to progress well on its major transmission projects – the New England East West Solution (NEEWS) and the Hydro-Quebec transmission project (Northern Pass), with in-service dates scheduled for 2014 and 2015, respectively. We believe these investments will provide attractive earnings and cash flow growth for NU for the next several years, without the need for any further incremental transmission growth opportunities in the region.
Furthermore, we expect NU to grow its regulated earnings in the future, resulting from improved base rates at its operating utilities. Recently, NU’s Connecticut and New Hampshire utilities received draft decisions approving rate increases of $98.8 million and $45.5 million, respectively. Final decisions on these cases are to be received shortly. The two rate increases together are expected to positively impact NU’s earnings for the rest of 2010.
Financially, the company’s balance sheet remains strong with cash and cash equivalents of $30 million and available borrowing capacity of $694.1 million as on March 31, 2010. Additionally, the company increased its dividend by 7.9% to an annual rate of $1.025 per share, currently yielding a competitive 3.9%. A series of regular dividend hikes is a strong signal to the market that cash flow can sustain the dividend payout.
We believe NU shares offer a strong long-term growth potential given its new transmission project backlog such as the NEEWS and the HQ lines and expectations of reasonable resolutions at the pending rate cases.
Neutral Recommendation
Going forward, positive factors offering valuation upside include stable, regulated electric and natural gas operations, expected rate increases, and sufficient cash flow to produce a record of dividend increases. We project a 6% to 9% annual earnings growth in the foreseeable future.
However, there remains uncertainty over the outcomes of the regulatory rate cases and potential delays in regulated transmission projects. Such delays and uncertainties could weigh on the performance of the stock.
Furthermore, we believe the synergies of the transmission projects are already factored in the company’s valuation. This leaves little room for upside, thus, guiding us to hold our Neutral view on the stock.
Read the full analyst report on “NU”
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