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Diversified utility company Northeast Utilities’ (NU - Analyst Report) second quarter 2012 pro forma earnings of 45 cents per share were in line with the Zacks Consensus Estimate of 45 cents but surpassed the year-ago earnings by a penny.

The modest rise in earnings was due to continued investments in Northeast Utilities’ electric transmission systems partially offset by lower retail sales from each of the company’s business wings and higher miscellaneous costs.

GAAP earnings per share during the quarter were 15 cents versus 44 cents per share reported in the year-ago quarter.

The difference in pro forma and GAAP earnings resulted from after-tax charges of 30 cents related to the merger of Northeast Utilities and Massachusetts-based utility company NSTAR.

Total Revenue

Northeast Utilities reported quarterly operating revenue of $1,629.0 million, up 55.4% from $1,048.0 million a year ago. Revenue in the reported quarter edged out the Zacks Consensus Estimate of $1,503 million.

The revenue ramp reflects overall gains from the company’s electric transmission, distribution and generation businesses owing to high power prices. Besides, the addition of NSTAR’s transmission outcomes accentuated the aggregate revenue of Northeast Utilities during the quarter.

Electric Sales Volumes

Northeast Utilities' overall retail electric sales in the second quarter dropped marginally by 1.2% year over year to 12,835 Gigawatt hours (GWh) due to weather irregularities in the months of April and May.  Yankee Gas' natural gas sales also took a hit and fell by 5% to 8,053 million cubic feet (MMcf) from 8,480 MMcf in the year-ago quarter.

Segmental Earnings

Distribution & Generation: Electric and Gas Distribution earnings totaled $70.5 million in the second quarter, compared with $39.1 million in the prior-year quarter.

The upside in quarterly earnings was due to efficient management of operating costs, which was partially offset by temperature variations, higher pension costs, health care expenses and depreciation expenditures.

Natural Gas Distribution: Yankee Gas Services Company reported earnings of $0.1 million, down 97% from $2.1 million in the prior-year quarter. This was due to a decline in natural gas sales resulting from lower customer demand.

Transmission: The Transmission segment’s quarterly earnings of $63.7 million improved markedly by 51% from $42.2 million earned in the prior-year quarter. This improvement in earnings reflected a streak of profitable investments undertaken by the company including its merger with the high-profile NSTAR syndicate.

NU Parent & Other Companies: Net expenses from these companies registered income growth of $1.6 million in the quarter driven by the inclusion of NSTAR Communications and lower interest expenses.
 
Operational Highlights

On the cost side, Northeast Utilities’ results were unfavorable with total operating expense rising to $1,469.2 million from $869.3 million at the end of June 2011. Higher fuel and power cost of 42% combined with a surge in depreciation expenses of 96.2% was mainly responsible for the cost hike.

Northeast Utilities’ operating income in the current quarter totaled $160.0 million compared with $178.1 million in second quarter 2011.

Interest expense increased substantially by 43% to $89.0 million from $62.2 million in the year-ago quarter, indicating rising long-term debt.

Financial Update

As of June 30, 2012, Northeast Utilities had cash and cash equivalents of $28.5 million versus $6.6 million as of December 31, 2011.

Cash flow from operating activities was $320.4 million versus $687 million in the year-ago comparable quarter.

Long-term debt as of June 30, 2012 was $6,936.4 million, up from $4,615 million as of December 31, 2011.

Peer Comparison

NiSource Inc. (NI - Analyst Report), which closely competes with Northeast Utilities, posted second quarter 2012 net operating earnings of 23 cents per share compared with 17 cents in the prior-year quarter. Quarterly earnings surpassed the Zacks Consensus Estimate of 20 cents.

Total revenue in the quarter under review declined 12.1% year over year to $1,038.1 million from $1,181 million in the second quarter of 2011. The year over year decline was attributed to significantly lower performance from the Gas Distribution business. Revenue missed the Zacks Consensus Estimate of $1,165 million.

Our View

The company reported favorable financial results in the second quarter. However, Northeast Utilities’ uninspired performance in terms of cost-control initiatives during the quarter makes us weary of further rise in operational costs. Besides, unforeseen accidents and breakdowns at the plants could pose severe operational risks.

On the positive, the addition of NSTAR would be beneficial to Northeast Utilities’ customers. Investments in growth projects would also give a boost to future performance.

Northeast Utilities holds a Zacks #4 Rank implying a short-term Sell rating. We have a Neutral recommendation on the company in the long run.

Based in Hartford, Connecticut, Northeast Utilities engages in the energy delivery business for residential, commercial, and industrial customers.

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