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We reiterate our Neutral recommendation on Northeast Utilities (NU - Analyst Report). The first quarter 2012 results of the company were impacted by mild weather and higher pension costs, dragging the results below our expectation and the year-ago period performance.
The financial performance of a utility provider largely depends on its ability to manage its transmission and distribution businesses. In the first quarter of 2012, Northeast’s regulated businesses added considerably to its total earnings. The company upgrades its transmission and distribution portfolio at regular intervals, which enables the company to provide uninterrupted service to its customers and eventually generate more revenue. But, the costs incurred by Northeast Utilities’ regulated companies to construct and maintain their electric delivery systems have escalated in recent years due to higher costs of commodities and electrical products.
The company has recently completed its merger with NSTAR, which makes Northeast the largest utility company in New England. This merger is expected to create cost synergies of $1 billion over the first 10 years, which will enable the company to achieve the higher end of its earnings growth objective. The merged entity is expected to benefit from a wide customer base and increased scale of operations.
Northeast Utilities had cash and cash equivalents of $283.3 million as of March 31, 2012. A strong financial position allows the company to expand its transmission portfolio. The company invested a substantial amount in its major transmission projects, primarily the New England East West Solution and the Hydro-Quebec transmission project. We believe these investments will result in attractive earnings and cash flow growth for the company over the next several years.
On the negative side, operations of the utility companies are subject to federal and state legislative requirements, and extensive environmental regulations, related to maintenance of air and water quality, and minimization of greenhouse gas and carbon dioxide emissions. Changes in the regulatory environment rules could impact the company’s financial performance. Further, the company expects to incur significant costs related to compliance with existing and new environmental regulations.
Apart from that, transmission and distribution businesses face several operational risks including breakdown, failure or damage of equipments or processes, accidents and labor disputes.
The Zacks Consensus Estimates for Northeast Utilities’ second quarter and full year 2012 earnings are pegged at 46 cents and $2.35 per share, respectively.
Northeast Utilities currently retains a Zacks #3 Rank (short-term Hold rating).
Based in Hartford, Connecticut, Northeast Utilities engages in the energy delivery business and serves residential, commercial, and industrial customers. The company competes with NiSource Inc. (NI - Analyst Report).