We reiterate our Neutral recommendation on
Northeast Utilities
(
NU
). 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
).
NISOURCE INC (NI): Free Stock Analysis Report
NORTHEAST UTIL (NU): Free Stock Analysis Report
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