Northeast Utilities Lights Up New England

04/09/2014 7:00 am EST


David Dittman

Chief Investment Strategist, Australian Edge, Canadian Edge, & Utility Forecaster

Here's the latest Spotlight Income idea from utility sector specialist David Dittman. In his Utility Forecaster, the advisor looks at New England's largest utility system.

Northeast Utilities (NU) is New England's largest utility system, serving more than 1.7 million electricity customers in Connecticut, Massachusetts, and New Hampshire.

Because of its earnings growth profile, a heavy concentration of Federal Energy Regulatory Commission-regulated earnings, a relatively light rate-case calendar and a strong financial position, we're adding the stock to the Income Portfolio Aggressive Holdings.

Management continues to boost the utility capital expenditure budget, with significant upside for transmission-related projects beyond currently planned investments.

FERC transmission currently accounts for approximately 35% of earnings, versus 5% to 15% for its peers. And a proven management team has demonstrated its ability to deal well with state and federal regulators for constructive outcomes and to deliver on targeted financial goals.

Northeast's fourth-quarter and full-year 2013 results were as forecast, with adjusted earnings per share for the three months ended December 31, pushing the 12-month total to $2.53, in the middle of a $2.45-to-$2.60 guidance range. Solid growth supported a 6.8% dividend increase.

Excluding one-time items, including rate credits, storm cost write-downs, and merger-related costs, each of Northeast's reporting segments posted improved earnings on a year-over-year basis.

Management provided initial 2014 EPS guidance of $2.60 to $2.75. Northeast also expects EPS growth of 6% to 8% from a 2012 base year through 2017.

Future generation needs suggest that significant new transmission, beyond already announced projects, will be needed. Reliability looks challenged for future weather events, like those seen recently, particularly with upcoming generation retirements like the Vermont Yankee nuclear facility.

Northeast's 1,200 megawatt Northern Pass project, which has faced substantial opposition, looks more and more necessary from a reliability standpoint. It's on track for a 2017 in-service date. With a yield of 3.5%, Northeast Utilities is a buy under $47.

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