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Costs, Weather Hurt Northeast Utilities

NI NU

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Diversified utility Northeast Utilities’ (NU - Analyst Report) third quarter 2011 operating earnings of 51 cents per share came in short of the Zacks Consensus Estimate of 55 cents. Operating net income in the quarter totaled $90.6 million.

The earnings miss is mainly attributable to the lower operating results on account of a decline in retail electric sales as well as higher pension and other employee benefit costs and effective tax rate.

Including an after-tax expense of $0.6 million, Northeast Utilities’ GAAP net income for the third quarter was $90 million or 51 cents per share compared with the year-ago earnings of $100.5 million or 57 cents.

Net revenues of $1.11 billion in the quarter were down 10.3% from $1.24 billion in the prior-year quarter. Revenues also lagged the Zacks Consensus Estimate of $1.20 billion.

Electric Sales Volumes and Expenses

Northeast Utilities' retail electric sales were down 2.1% from the comparative 2010 quarter to 9,246 Giga watt hours (GWh), due in part to a milder weather in the third quarter of 2011 and the impact of Tropical Storm Irene. On a weather-adjusted basis, however, electric sales improved 2.3% in the quarter. Yankee Gas' natural gas sales increased 5.3% to 6.4 billion cubic feet (Bcf). On a weather-adjusted basis, Yankee Gas sales showed an increase of 5.2% year over year.

On the cost side, Northeast Utilities’ results continued to be impressive given its continued cost control measures. Total operating expense improved 12.7% year over year to $911.1 million in the quarter. Lower fuel and power cost coupled with lower amortization costs led to the decline, offset by a rise in depreciation, maintenance and other operating expenses.

Additionally, the company’s effective tax rate also increased for the third quarter of 2011, due to higher income tax expense compared to the third quarter of 2010.

Despite the decline in revenue, Northeast Utilities’ operating income for the quarter benefitted from the improvement in cost. Operating income in the quarter was up 2.1% to $203.8 million from $199.6 million in the prior-year quarter.

Segment Earnings

Distribution & Generation:  Earnings at the segment, comprising Electric and Gas Distribution earnings, totaled $55 million in the quarter, a marginal improvement of 1.3% from the year-ago earnings of $55.7 million.

The earnings increase came mainly from an improvement in earnings from its distribution subsidiary - Connecticut Light and Power Company (CL&P), offset largely by the decline in earnings of two other distribution subsidiaries, namely, Public Service Company of New Hampshire’s (PSNH) and Western Massachusetts Electric Company (WMECO).

Yankee Gas Services Company lost $3 million in the third quarter of 2011, compared with a loss of $2.9 million in the third quarter of 2010.

Transmission: The Transmission segment’s quarterly earnings of $41.5 million, dipped 8.2% from $45.2 million earned in the prior-year quarter, reflecting a higher effective tax rate and certain higher employee benefit costs, partially offset by a higher transmission rate base.

NU Parent & Other Companies:  The segment recorded net expenses of $6.5 million in the quarter compared with expenses of $0.4 million in the prior-year quarter. Excluding merger expenses, the segment recorded net expenses of $5.9 million in the third quarter of 2011.

Financial Update

As of September 30, 2011, Northeast Utilities had cash and cash equivalents of $16.7 million compared to $23.4 million as of December 31, 2010.

Cash generated from operations for the nine months ended September 30, 2011 was $888.4 million, higher than $843.6 million for the year-ago comparable period. Capital expenditure for the period increased to $749.1 million, up from $677.6 million spent in the comparable period last year.

Guidance

Northeast Utilities reiterated its earnings guidance range of $2.30 to $2.40 per share for 2011. Including merger expenses of roughly 20 cents per share, Northeast Utilities projects earnings in the $2.10 to $2.20 per share range.

Northeast Utilities’ guidance for 2011 reflects Distribution & Generation segment earnings of $1.30−$1.35 per share, Transmission segment earnings of $1.05−$1.10 per share and NU parent and other companies net expenses of $0.05 per share.

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 its bottom line.

Northeast Utilities’ closest peer NiSource Inc. (NI - Analyst Report) posted third quarter 2011 net operating earnings of 11 cents per share, surpassing the Zacks Consensus Estimate by a penny and the year-ago figure by 7 cents. The company’s revenue of $1.02 billion showed an improvement of 1.9% from last year but missed our estimate of $1.05 billion.

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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