NSTAR (NASDAQ: NST) is the largest electricity and natural gas utility company in Massachusetts. NSTAR delivers electricity to 1.1 million customers and natural gas to 300,000 customers including residential, commercial, and institutional properties. The company does not, however, generate power.
Though operating revenue peaked in 2006 and fell slightly in 2007, net income has risen each year by 3-7% for the past five years to reach $222 million in 2007. NSTAR effectively has no competition due to the state charter that grants it exclusive rights to retail energy in its territory. It suffers little exposure to the commodities markets since its rates are fixed as to pass off increases in commodities costs to its customers, and its institutional customers, less sensitive to price changes than commercial customers, also help to keep its revenue stream steady.
However, revenue growth, which comes from expansion of capacity, is slow since Massachusetts is ranked 41st out of 50 states for population growth. To increase its electricity-delivering capacity, NSTAR is in the process of constructing three high-voltage transmission lines. The construction project will incur $1.6 billion in debt, payable from 2008 to 2012; however, other utility companies in New England will share in the cost. The company is also pioneering green energy plans, which let customers to have half or all of their electricity be generated on a local wind farm at a slightly higher cost.
NSTAR is a holding company comprised of subsidiaries that deliver electricity and natural gas to customers in Massachusetts. The company does not produce energy, but instead focuses on transporting and distributing energy to its 1.4 million customers.
Net income rose by 7% to $221.5 million in 2007, due to higher revenues from both the electricity and the natural gas division. However, operating revenue fell by 9% from an all-time high of $3.58 billion in 2006. NSTAR’s electricity customers make up just under 50% of the population of its designated territory, and its natural gas customers make up 25% of the population of the territory. Since utility companies are regulated and granted charters of operation in Massachusetts, NSTAR is effectively a monopoly within its granted territory, where no other electricity or natural gas delivery companies can tap the market of retail customers.
NSTAR’s business is highly cyclical, seasonal weather conditions playing a large role in the demand for energy. Revenues are highest during the first and third quarters, the winter and summer months respectively. Weather conditions primarily affect electricity sales during the summer and gas sales during the winter. The company attributes the 1.9% decrease in energy sales to a cool summer and the warmest November and December in Boston’s history. Warmer winter conditions, along with a spike in the price of natural gas, contributed to a 9.4% decrease in natural gas sales.
To expand its power transmission capacity, NSTAR has begun work on the construction of three high-voltage transmission lines that are expected to be complete in 2009. NSTAR expects to incur approximately $1.6 billion of debt for the construction project, but other utility companies in New England will also contribute to the cost.
Retail Electric Sales (thousands MWH)
Firm Gas Sales (BBtu)
NSTAR transports and delivers electricity and natural gas to residential, industrial, and institutional properties in Massachusetts.
Massachusetts state government passed the Green Communities act in July 2008, whose provisions include that distribution companies purchase the most cost-effective and stable resources, potentially from nontraditional sources. The government also establishes NSTAR as a near-monopoly by determining the territory in which only NSTAR can operate. Although government policies have helped make NSTAR financially and operationally stable, NSTAR’s rates will be subject to adjustment if the company profits more than expected.
In response to customer demand for electricity from alternative sources, the company launched NSTAR Green, a program that lets customers opt in to buy half or all of their electricity from local wind farms. NSTAR expects that buying 100% of a household’s electricity from a wind farm will increase the bill by about $7. But the success of this program is contingent on customers’ willingness to pay slightly more for energy generated from renewable sources. Customers’ potential unwillingness to opt in would hurt NSTAR, since the contracts it signed with local wind farms run for ten years.
NSTAR expects to hold over $1.5 billion in debt from 2008 to 2012. In previous years, companies were able to easily issue long-term bonds to finance long-term debt for construction projects, especially stable and risk-averse firms like utilities companies. After the U.S. credit crisis in 2007 spread globally in 2008, corporate bond sales are down by over 80% from the same time last year, meaning that NSTAR will have more difficulty financing its debt.
NSTAR holds a charter that gives it the exclusive right to distribute and deliver electricity and natural gas to retail customers in the designated areas of Massachusetts. No other companies can deliver electricity or natural gas in those areas without the express consent of NSTAR. As such, NSTAR is almost completely exempt from competitive pressures.