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NU > SEC Filings for NU > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for NORTHEAST UTILITIES


7-Nov-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related combined notes included in this combined Quarterly Report on Form 10-Q, the NU First and Second Quarter 2012 Quarterly Reports on Form 10-Q, the NSTAR Electric First Quarter 2012 Quarterly Report on Form 10-Q, the NU 2011 Form 10-K, the NSTAR 2011 Form 10-K, and the NSTAR Electric 2011 Form 10-K. References in this Form 10-Q to "NU," the "Company," "we," "us" and "our" refer to Northeast Utilities and its consolidated subsidiaries, including NSTAR LLC and its subsidiaries for periods after April 10, 2012. All per share amounts are reported on a diluted basis.

Refer to the Glossary of Terms included in this combined Quarterly Report on Form 10-Q for abbreviations and acronyms used throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations.

The only common equity securities that are publicly traded are common shares of NU. The earnings and EPS of each business discussed below do not represent a direct legal interest in the assets and liabilities allocated to such business but rather represent a direct interest in our assets and liabilities as a whole.
EPS by business is a financial measure not recognized under GAAP that is calculated by dividing the Net Income Attributable to Controlling Interest of each business by the weighted average diluted NU common shares outstanding for the period. The discussion below also includes non-GAAP financial measures referencing our third quarter and first nine months of 2012 and 2011 earnings and EPS excluding certain impacts related to NU's merger with NSTAR. We use these non-GAAP financial measures to evaluate and to provide details of earnings results by business and to more fully compare and explain our third quarter and first nine months of 2012 and 2011 results without including the impact of the non-recurring merger and related settlement costs. Due to the nature and significance of these items on Net Income Attributable to Controlling Interest, we believe that the non-GAAP presentation is more representative of our financial performance and provides additional and useful information to readers of this report in analyzing historical and future performance by business.
These non-GAAP financial measures should not be considered as an alternative to reported Net Income Attributable to Controlling Interest or EPS determined in accordance with GAAP as an indicator of operating performance.

Reconciliations of the above non-GAAP financial measures to the most directly comparable GAAP measures of consolidated diluted EPS and Net Income Attributable to Controlling Interest are included under "Financial Condition and Business Analysis - Overview - Consolidated" in Management's Discussion and Analysis, herein.

Forward-Looking Statements: From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, assumptions of future events, financial performance or growth and other statements that are not historical facts. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You can generally identify our forward-looking statements through the use of words or phrases such as "estimate," "expect," "anticipate," "intend," "plan," "project," "believe," "forecast," "should," "could," and other similar expressions.
Forward-looking statements are based on the current expectations, estimates, assumptions or projections of management and are not guarantees of future performance. These expectations, estimates, assumptions or projections may vary materially from actual results. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors that could cause our actual results to differ materially from those contained in our forward-looking statements, including, but not limited to:

actions or inaction by local, state and federal regulatory and taxing bodies,

changes in business and economic conditions, including their impact on interest rates, bad debt expense, and demand for our products and services,

changes in weather patterns,

changes in laws, regulations or regulatory policy,

changes in levels and timing of capital expenditures,

disruptions in the capital markets or other events that make our access to necessary capital more difficult or costly,

developments in legal or public policy doctrines,

technological developments,

changes in accounting standards and financial reporting regulations,

actions of rating agencies,

the possibility that expected merger synergies will not be realized or will not be realized within the expected time period, and

other presently unknown or unforeseen factors.

Other risk factors are detailed in NU's and NSTAR's reports filed with the SEC and updated as necessary, and we encourage you to consult such disclosures.

All such factors are difficult to predict, contain uncertainties that may materially affect our actual results and are beyond our control. You should not place undue reliance on the forward-looking statements, each speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for us to predict all of such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking

statements. For more information, see Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q, and in NU's 2011 Form 10-K, NSTAR's 2011 Form 10-K, and NSTAR Electric's 2011 Form 10-K. This Quarterly Report on Form 10-Q, NU's 2011 Form 10-K, NSTAR's 2011 Form 10-K, and NSTAR Electric's 2011 Form 10-K also describe material contingencies and critical accounting policies and estimates in the accompanying Management's Discussion and Analysis and Combined Notes to Condensed Consolidated Financial Statements. We encourage you to review these items.

Financial Condition and Business Analysis

Merger with NSTAR:

On April 10, 2012, NU and NSTAR completed their merger. Pursuant to the terms and conditions of the Agreement and Plan of Merger, as amended, the "Merger Agreement," NSTAR merged into NSTAR LLC, becoming a wholly-owned subsidiary of NU. Unless otherwise noted, the results of NSTAR LLC and its subsidiaries, hereinafter referred to as "NSTAR," are included from the date of merger, April 10, 2012, through September 30, 2012 throughout this Management's Discussion and Analysis.

The transaction was structured as a merger of equals in a tax-free exchange of shares. Pursuant to the Merger Agreement, NU issued to NSTAR shareholders 1.312 NU common shares for each issued and outstanding NSTAR common share. As a result, NU had approximately 314 million shares outstanding as of April 30, 2012, compared with approximately 178 million shares outstanding as of March 31, 2012.

Executive Summary

The following items in this executive summary are explained in more detail in this Quarterly Report on Form 10-Q:

Results and Outlook:

We earned $207.6 million, or $0.66 per share, in the third quarter of 2012, and $351.2 million, or $1.32 per share, in the first nine months of 2012, compared with $90 million, or $0.51 per share, in the third quarter of 2011 and $281.4 million, or $1.58 per share, in the first nine months of 2011. Excluding after-tax merger-related costs of $12.9 million, or $0.04 per share, we earned $220.5 million, or $0.70 per share, in the third quarter of 2012. Excluding after-tax merger and related settlement costs of $105.5 million, or $0.40 per share, we earned $456.7 million, or $1.72 per share, in the first nine months of 2012. The third quarter and first nine months of 2012 earnings improved due primarily to the inclusion of NSTAR effective April 10, 2012 as well as higher transmission segment earnings as a result of increased investments in the transmission infrastructure.

The addition of NSTAR effective April 10, 2012 provided an earnings contribution of $105 million in the third quarter of 2012 and $141 million from April through September 2012. Due to the timing of the merger closing, NSTAR results for the first three months of 2012 are not reflected in NU's results for the first nine months of 2012.

Our transmission segment earned $71.1 million, or $0.23 per share, in the third quarter of 2012 and $181.1 million, or $0.68 per share, in the first nine months of 2012, compared with $41.5 million, or $0.23 per share, in the third quarter of 2011 and $128.4 million, or $0.72 per share, in the first nine months of 2011.

Our electric distribution segment earned $150.5 million, or $0.48 per share, in the third quarter of 2012 and $212.1 million, or $0.80 per share, in the first nine months of 2012, compared with earnings of $58 million, or $0.33 per share, in the third quarter of 2011, and $152.8 million, or $0.86 per share, in the first nine months of 2011. Third quarter and the first nine months of 2012 results reflect $0.2 million and $51 million, respectively, of after-tax merger and related settlement costs.

Our natural gas distribution segment recorded net losses of $4.4 million, or $0.02 per share, in the third quarter of 2012 and earned $8.3 million, or $0.03 per share, in the first nine months of 2012, compared with net losses of $3 million, or $0.02 per share, in the third quarter of 2011 and earnings of $20.7 million, or $0.12 per share, in the first nine months of 2011. First nine months of 2012 results reflect $2.1 million of after-tax merger and related settlement costs.

NU parent and other companies recorded net losses of $9.6 million, or $0.03 per share, in the third quarter of 2012 and $50.3 million, or $0.19 per share, in the first nine months of 2012, compared with net losses of $ 6.5 million, or $0.03 per share, in the third quarter of 2011 and $20.5 million, or $0.12 per share, in the first nine months of 2011. Third quarter and the first nine months of 2012 results reflect $12.7 million and $52.4 million, respectively, of after-tax merger and related settlement costs.

We project capital expenditures of approximately $7 billion from 2012 through 2015, including approximately $1.7 billion in 2012. Of the $7 billion, we expect to invest approximately $3.5 billion in our electric and natural gas distribution segments, including our generation businesses, and $3.2 billion in our electric transmission segment. In addition, we project capital expenditures of approximately $1.2 billion from 2016 through 2017 in our electric transmission segment.

Legislative, Regulatory, Policy and Other Items:

On August 1, 2012, efforts to settle a complaint filed at FERC by various New England parties concerning the base ROE earned by New England transmission owners ended without a settlement. Soon thereafter, litigation began before a FERC trial judge. On October 1, 2012, the complainants filed additional testimony recommending that the base ROE be lowered from the current 11.14

percent to 9 percent. Certain Massachusetts municipal electric companies were admitted late to the case, and filed testimony recommending a base ROE of 8.2 percent. The trial judge's ruling is due in September 2013 and a FERC decision is expected in 2014.

On August 3, 2012, Massachusetts Governor Patrick signed into law "An Act Relative to Competitively Priced Electricity in the Commonwealth." The Act (1) requires electric utility companies to file a distribution rate case every five years and natural gas companies every 10 years, limiting those companies to one settlement agreement in a 10-year period, (2) extends the distribution rate case review period to 10 months, and (3) requires all distribution companies to enter into additional cost-effective long-term renewable energy distribution contracts with remuneration of 2.75 percent to each utility company of annual contract payments.

On August 6, 2012, Massachusetts Governor Patrick signed into law "An Act relative to emergency service response of public utility companies" to help improve utility companies' emergency response and communication. The Act (1) codifies certain emergency response plan provisions, which require utility companies to submit plans for DPU review and approval, (2) requires that all future financial penalties levied to utilities by the DPU relating to violation of storm and emergency service performance standards will be provided to customers, and (3) requires transmission companies to notify appropriate parties before performing vegetation management activities within a right-of-way.

On October 5, 2012, Connecticut announced a draft comprehensive energy strategy.
The draft includes a series of policy proposals, which aim to expand energy choices, including natural gas, lower utility bills for Connecticut residents and businesses, improve environmental conditions, create clean energy jobs, and enhance the state's quality of life. The draft is subject to public comment and is expected to be finalized by the end of 2012. Many of the recommendations in the draft will require actions by the PURA and potentially the legislature.

On October 29, 2012, Hurricane Sandy caused extensive damage to our electric distribution system across all three states. We estimate that approximately 1.5 million of our 3.1 million electric distribution customers were without power during or following the storm. Restoration costs cannot be estimated at this time. We expect the costs to meet the criteria for specific cost recovery in each state in which we operate and, as a result, we do not expect the storm to have a material impact to our results of operations.

Liquidity:

Cash and cash equivalents totaled $73.4 million as of September 30, 2012, compared with $6.6 million as of December 31, 2011, while cash capital expenditures totaled $1.1 billion in the first nine months of 2012, compared with $749.1 million in the first nine months of 2011.

Cash flows provided by operating activities totaled $700.8 million in the first nine months of 2012, compared with $837.2 million in the first nine months of 2011 (amounts are net of RRB payments). The reduced cash flows were due primarily to $187.7 million of 2012 cash disbursements for storm costs primarily related to Tropical Storm Irene and the October 2011 snowstorm, $187.3 million of 2012 Pension Plan cash contributions, a total of $46 million of bill credits in the second quarter of 2012 to customers of CL&P, NSTAR Electric, NSTAR Gas and WMECO related to the Connecticut and Massachusetts settlement agreements, $27 million in bill credits provided to CL&P residential customers in February 2012 related to the October 2011 snowstorm, and approximately $34 million of transaction cost payments related to the merger.

On October 1, 2012, CL&P redeemed at par four different series of tax-exempt PCRBs totaling $116.4 million. The PCRBs carried coupons that ranged from 5.85 percent to 5.95 percent and maturities that ranged from 2016 through 2028. On October 1, 2012, WMECO redeemed at par $53.8 million of tax-exempt PCRBs. The PCRBs had a maturity date of 2028 and a coupon of 5.85 percent.

On October 4, 2012, WMECO issued at a premium $150 million of senior unsecured notes at a yield of 2.673 percent that will mature on September 15, 2021. The senior unsecured notes are part of the same series of WMECO's existing 3.5 percent coupon Series F Notes that were initially issued in September 2011. As a result, the aggregate principal amount of WMECO's outstanding Series F Notes totaled $250 million.

On October 15, 2012, NSTAR Electric issued at a discount $400 million of 2.375 percent Debentures at a yield of 2.406 percent that will mature on October 15, 2022. The proceeds were used to pay $400 million of 4.875 percent Debentures that matured on October 15, 2012.

On November 1, 2012, our Board of Trustees approved a common dividend payment of $0.343 per share, payable December 31, 2012 to shareholders of record as of November 30, 2012.

Overview


Consolidated:  A summary of our earnings by business, which also reconciles the
non-GAAP financial measures of consolidated non-GAAP earnings and EPS, as well
as EPS by business, to the most directly comparable GAAP measures of
consolidated Net Income Attributable to Controlling Interest and diluted EPS,
for the third quarter and first nine months of 2012 and 2011 is as follows:


                            For the Three Months Ended September 30,                For the Nine Months Ended September 30,
(Millions of
Dollars, Except                 2012                         2011                      2012 (1)                      2011
 Per Share
Amounts)               Amount        Per Share       Amount      Per Share       Amount        Per Share     Amount     Per Share
Net Income
Attributable to
 Controlling
Interest (GAAP)      $    207.6     $     0.66     $    90.0    $     0.51    $     351.2     $     1.32    $ 281.4    $     1.58
Regulated
Companies            $    217.4     $     0.69     $    96.5    $     0.54    $     454.6     $     1.71    $ 301.9    $     1.70
NU Parent and
Other Companies             3.1           0.01          (5.9)        (0.03)           2.1           0.01      (10.4)        (0.06)
Non-GAAP Earnings         220.5           0.70          90.6          0.51          456.7           1.72      291.5          1.64
Merger and Related
Costs
 (after-tax)              (12.9)         (0.04)         (0.6)            -         (105.5)         (0.40)     (10.1)        (0.06)
Net Income
Attributable to
 Controlling
Interest (GAAP)      $    207.6     $     0.66     $    90.0    $     0.51    $     351.2     $     1.32    $ 281.4    $     1.58

(1)

Results include the operations of NSTAR from the date of merger, April 10, 2012, through September 30, 2012.

The after-tax merger and related settlement costs for the first nine months of 2012 consisted of the following charges:

Transaction and integration-related costs of $33.2 million at NU parent related to investment advisory fees, attorney fees, and consulting costs;

Change in control costs and other compensation costs of $12.2 million at NU parent and NSTAR;

A $23.6 million charge at CL&P related to the Connecticut settlement agreement, whereby CL&P agreed to forego recovery of $40 million (pre-tax) of the deferred storm costs associated with Tropical Storm Irene and the October 2011 snowstorm;

A $14.8 million charge at CL&P for customer bill credits related to the Connecticut settlement agreement;

An aggregate of $12.8 million in charges at NSTAR Electric, NSTAR Gas, and WMECO for customer bill credits related to the Massachusetts settlement agreement; and

An $8.9 million charge at NU parent for the establishment of a fund to advance Connecticut energy goals related to the Connecticut settlement agreement.

Excluding the impact of merger-related costs, earnings increased by $129.9 million in the third quarter of 2012 due primarily to the inclusion of NSTAR effective April 10, 2012, higher transmission segment earnings as a result of increased investments in the transmission infrastructure, and higher retail electric sales. On an earnings per share basis, the earnings contribution of $105 million in the third quarter of 2012 from NSTAR was partially offset by the issuance of 136 million common shares to close the merger. Offsetting these favorable earnings impacts were higher operations and maintenance expenses, including higher pension and healthcare expenses, higher vegetation management costs and storm restoration costs, depreciation, property tax expense, and higher interest expense as a result of new long-term debt issued in September 2011.

Excluding the impact of merger and related settlement costs, earnings increased by $165.2 million in the first nine months of 2012 due primarily to the inclusion of NSTAR effective April 10, 2012 and higher transmission segment earnings. On an earnings per share basis, the earnings contribution of $141 million from April 2012 through September 2012 from NSTAR was partially offset by the impact of the issuance of 136 million common shares to close the merger.
Offsetting these favorable impacts were lower retail electric and firm natural gas sales due primarily to significantly milder weather in the first quarter of 2012, compared with the same period in 2011, higher pension expense, increased costs in utility system maintenance and vegetation management, and higher interest expense.

Regulated Companies: Our Regulated companies consist of the electric distribution, natural gas distribution, and transmission segments. Generation activities of PSNH and WMECO are included in our electric distribution segment.
A summary of our segment earnings for the third quarter and first nine months of 2012 and 2011 is as follows:

                                         For the Three Months       For the Nine Months
                                         Ended September 30,        Ended September 30,
(Millions of Dollars)                      2012          2011         2012         2011
Electric Distribution (1)              $     150.7     $  58.0    $     263.1     $ 152.8
Transmission (1)                              71.1        41.5          181.1       128.4
Natural Gas Distribution (1)                  (4.4)       (3.0)          10.4        20.7
Total Regulated Companies                    217.4        96.5          454.6       301.9
Merger and Related Costs (after-tax)          (0.2)          -          (53.1)          -
Net Income - Regulated Companies       $     217.2     $  96.5    $     401.5     $ 301.9

(1)

Results include the operations of NSTAR Electric and NSTAR Gas from the date of merger, April 10, 2012, through September 30, 2012.

The higher third quarter and first nine months of 2012 transmission segment earnings as compared to the same periods in 2011 were due primarily to the inclusion of the NSTAR Electric transmission business and increased investments in the transmission infrastructure, including GSRP, which is under construction in western Massachusetts and northern Connecticut.

Excluding the $0.2 million and $51 million of after-tax merger and related settlement costs in the third quarter and first nine months of 2012, respectively, the higher electric distribution segment earnings in the third quarter and first nine months of 2012 as compared to the same periods in 2011 were due primarily to the addition of the NSTAR Electric distribution business results. Excluding $0.2 million of after-tax merger-related costs, NSTAR Electric's distribution business earned $90.4 million in the third quarter of 2012 and excluding $10.8 million of after-tax merger and related settlement costs, primarily related to customer bill credits, NSTAR Electric's distribution business earned $132.3 million in the second and third quarters of 2012. For further information regarding NSTAR Electric's third quarter and first nine months of 2012 earnings, as compared to the same periods in 2011, see "Results of Operations - NSTAR Electric Company and Subsidiaries - Earnings Summary" in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Excluding the merger-related costs and the addition in 2012 of NSTAR Electric's distribution business results, our third quarter 2012 electric distribution segment earnings were $2.3 million higher than the same period of 2011 due primarily to higher retail electric sales at our electric companies, the favorable impact of PSNH's 2010 distribution rate case decision related to the additional increase to annualized rates that was effective July 1, 2012, and the absence of a $5.3 million pre-tax charge to establish a reserve related to a WMECO wholesale billing adjustment in the third quarter of 2011. Partially offsetting this increase was higher operation and maintenance expenses, including pension expense, vegetation management and storm restoration costs, and higher income tax expense.

Excluding the merger and related settlement costs and the addition in 2012 of NSTAR Electric's distribution business results, our first nine months of 2012 electric distribution segment earnings were $22 million lower than the same period of 2011 due primarily to lower retail revenue, which was the result of warmer than normal weather in the first quarter of 2012 as compared to colder than normal weather in the first quarter of 2011. In addition, our distribution segment had higher pension expense and an increase in system maintenance, higher storm restoration costs and vegetation management costs, higher depreciation and property taxes, and higher income tax expense, partially offset by the absence of a $5.3 million pre-tax charge to establish a reserve related to a WMECO wholesale billing adjustment in the third quarter of 2011 and the favorable impacts of CL&P's 2010 distribution rate case decision on rates effective July 1, 2011 and PSNH's 2010 distribution rate case decision on rates effective July 1, 2012.

Excluding the $2.1 million after-tax merger-related costs recognized in the second quarter of 2012 and the addition of NSTAR Gas' results (losses of $2.3 million and $2.1 million in the third quarter and for the first nine months of 2012, respectively) our natural gas distribution segment earnings were $0.9 million higher and $8.2 million lower in the third quarter of 2012 and for the first nine months of 2012, respectively, when compared to the same periods of 2011. The third quarter earnings improvement was due primarily to the favorable impacts of the Yankee Gas 2011 rate case decision related to the additional increase to annualized rates that was effective July 1, 2012, partially offset by higher depreciation and property tax expense. The first nine months of 2012 earnings were lower than the same period of 2011 due primarily to a decrease in total firm natural gas sales, which was primarily the result of warmer than normal weather in the first half of 2012 as compared to the first half of 2011, and higher depreciation and property tax expense. These costs were partially offset by lower operations and maintenance costs as well as the favorable impacts of the Yankee Gas 2011 rate case decision related to the additional increase to annualized rates that was effective July 1, 2012.

A summary of our retail electric GWh sales and percentage changes, as well as changes in CL&P, NSTAR Electric, PSNH and WMECO retail electric GWh sales, and our firm natural gas sales and percentage changes in million cubic feet, as well as changes in Yankee Gas and NSTAR Gas' sales in million cubic feet, for the third quarter and first nine months of 2012, as compared to the same periods in 2011, is as follows:

                    For the Three Months Ended                  For the Nine Months Ended
                September 30, 2012 Compared to 2011        September 30, 2012 Compared to 2011
                   Sales (GWh)         Percentage             Sales (GWh)             Percentage
NU - Electric    2012      2011                          2012 (1)        2011          Increase
                 (1)                    Increase
Residential      6,217      4,041             53.8%          14,640       11,393             28.5%
Commercial       7,614      3,928             93.9%          17,611       10,934             61.1%
. . .
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