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NU > SEC Filings for NU > Form 10-Q on 2-May-2014All Recent SEC Filings

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Form 10-Q for NORTHEAST UTILITIES


2-May-2014

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 and the 2013 Annual Report on 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. All per share amounts are reported on a diluted basis. The unaudited condensed consolidated financial statements of NU, NSTAR Electric and PSNH and the unaudited condensed financial statements of CL&P and WMECO are herein collectively referred to as the "financial statements."

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 year. The discussion below also includes non-GAAP financial measures referencing our first quarter 2014 and 2013 earnings and EPS excluding certain integration costs related to NU's merger with NSTAR. We use these non-GAAP financial measures to evaluate and to provide details of earnings by business and to more fully compare and explain our first quarter 2014 and 2013 results without including the impact of these non-recurring items. 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, future 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:

          cyber breaches, acts of war or terrorism, or grid disturbances,

          actions or inaction of 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,

          fluctuations in weather patterns,

          changes in laws, regulations or regulatory policy,

          changes in levels or 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, and

          other presently unknown or unforeseen factors.

Other risk factors are detailed in our 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 2013 Annual Report on Form 10-K. This Quarterly Report on Form 10-Q and NU's 2013 Annual Report on Form 10-K also


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describe material contingencies and critical accounting policies in the accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations and Combined Notes to Condensed Consolidated Financial Statements (Unaudited). We encourage you to review these items.

Financial Condition and Business Analysis

Executive Summary

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

Results:

The earnings discussion below compares the three months ended March 31, 2014 with the same period in 2013:

We earned $236 million, or $0.74 per share, compared with $228.1 million, or $0.72 per share. Excluding integration costs, we earned $241.8 million, or $0.76 per share, compared with $229.9 million, or $0.73 per share. Improved earnings results were due primarily to higher retail electric and firm natural gas sales as a result of colder weather, partially offset by the absence of a favorable impact from the resolution of a state income tax audit in the first quarter of 2013.

The resolution of the state income tax audit provided a $13.6 million, or $0.04 per share, benefit to our first quarter 2013 earnings, consisting of a $6.7 million benefit to NU parent, a $5.7 million benefit to our transmission segment, and a $1.2 million benefit to our electric distribution segment.

Our electric distribution segment, which includes generation, earned $112.2 million, or $0.35 per share, compared with $99.5 million, or $0.32 per share.

Our transmission segment earned $74.9 million, or $0.24 per share, compared with $79.9 million, or $0.25 per share. The decrease was due to the absence of the $5.7 million favorable impact from the resolution described above.

Our natural gas distribution segment earned $52.1 million, or $0.16 per share, compared with $43.3 million, or $0.14 per share.

NU parent and other companies had net losses of $3.2 million, or $0.01 per share, compared with earnings of $5.4 million, or $0.02 per share. Excluding integration costs, NU parent and other companies earned $2.6 million, or $0.01 per share, compared with $7.2 million, or $0.02 per share. The decrease was due to the absence of the $6.7 million favorable impact from the resolution described above.

Regulatory Items:

On March 12, 2014, the PURA issued a final decision that approved recovery of CL&P's $365 million in storm restoration costs and ordered CL&P to capitalize approximately $18 million of the deferred storm restoration costs as utility plant. PURA will allow recovery of the $365 million with carrying charges in CL&P's distribution rates over a six-year period beginning December 1, 2014.

Pursuant to an October 2013 request from the New Hampshire Legislative Oversight Committee on Electric Utility Restructuring, staff of the NHPUC issued a report on April 1, 2014 that included a consultant's analysis of the fair market value of PSNH generating assets and long-term power purchase contracts. The consultant's analysis estimated the fair market value of PSNH's generation assets to be $225 million as of December 31, 2013, compared to their net book value of $660 million, implying potential "stranded costs" in excess of $400 million. The NHPUC staff recommended that any further actions relating to PSNH's generating assets await a final decision in the Clean Air Project prudence proceeding, that existing laws regarding divestiture, energy service, and cost recovery be harmonized, and that ISO-NE provide input on the economic and reliability consequences of retirement of PSNH's fossil generating plants. In the event of generation asset divestiture or retirement, both present law and the PSNH Restructuring Settlement Agreement approved in 2000 require that the NHPUC provide stranded cost recovery to PSNH.

Liquidity:

Cash and cash equivalents totaled $89.2 million as of March 31, 2014, compared with $43.4 million as of December 31, 2013, while investments in property, plant and equipment totaled $348.7 million in the first quarter of 2014, compared with $389 million in the first quarter of 2013.

Cash flows provided by operating activities totaled $493.8 million in the first quarter of 2014, compared with $473.1 million in the first quarter of 2013. The improved operating cash flows were due primarily to the absence of cash disbursements for major storm restoration costs and a decrease in Pension and PBOP Plan cash contributions, partially offset by an increase in income taxes paid in the first quarter of 2014, as compared to the first quarter of 2013, and the absence of costs recovered in rates related to the RRBs that were fully amortized in the first half of 2013.


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In the first quarter of 2014, we issued $400 million of new long-term debt consisting of $100 million by Yankee Gas on January 2, 2014 and $300 million by NSTAR Electric on March 7, 2014. These new issuances were used primarily to repay approximately $375 million of existing long-term debt.

On February 4, 2014, our Board of Trustees approved a common dividend payment of $0.3925 per share, payable on March 31, 2014 to shareholders of record as of March 3, 2014. On May 1, 2014, our Board of Trustees approved a common dividend payment of $0.3925 per share, payable June 30, 2014 to shareholders of record as of May 30, 2014.

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 first quarters of 2014 and 2013 is as follows:

                                                               For the Three Months Ended March 31,
                                                               2014                             2013
(Millions of Dollars, Except Per Share Amounts)       Amount         Per Share         Amount        Per Share
Net Income Attributable to Controlling Interest
(GAAP)                                             $      236.0    $        0.74    $      228.1    $       0.72

Regulated Companies                                $      239.2    $        0.75    $      222.7    $       0.71
NU Parent and Other Companies                               2.6             0.01             7.2            0.02
Non-GAAP Earnings                                         241.8             0.76           229.9            0.73
Integration Costs (after-tax)                              (5.8 )          (0.02 )          (1.8 )         (0.01 )
Net Income Attributable to Controlling Interest
(GAAP)                                             $      236.0    $        0.74    $      228.1    $       0.72

Excluding the impact of integration costs, our first quarter 2014 earnings increased by $11.9 million, as compared to the first quarter of 2013, due primarily to higher retail electric and firm natural gas sales as a result of colder weather, partially offset by the absence of a favorable impact from the resolution of a state income tax audit in the first quarter of 2013. The resolution of the state income tax audit provided a $13.6 million, or $0.04 per share, benefit to our first quarter 2013 earnings.

Regulated Companies: Our Regulated companies consist of the electric distribution, transmission, and natural gas distribution segments. Generation activities of PSNH and WMECO are included in our electric distribution segment. A summary of our segment earnings for the first quarters of 2014 and 2013 is as follows:

                                      For the Three Months
                                        Ended March 31,
(Millions of Dollars)                 2014           2013
Electric Distribution              $     112.2    $      99.5
Transmission                              74.9           79.9
Natural Gas Distribution                  52.1           43.3
Net Income - Regulated Companies   $     239.2    $     222.7

Our electric distribution segment earnings increased $12.7 million in the first quarter of 2014, as compared to the first quarter of 2013, due primarily to higher retail electric sales as a result of colder weather. The 2014 results were also favorably impacted by a PSNH rate increase effective July 1, 2013 as a result of the 2010 distribution rate case settlement. Partially offsetting these favorable impacts were higher depreciation and property tax expense.

Our transmission segment earnings decreased in the first quarter of 2014, as compared to the first quarter of 2013, due primarily to the absence of the favorable impact from the resolution of the state income tax audit in the first quarter of 2013, which provided a $5.7 million benefit to our first quarter 2013 transmission segment earnings, partially offset by a higher transmission rate base as a result of an increased investment in our transmission infrastructure.

Our natural gas distribution segment earnings increased in the first quarter of 2014, as compared to the first quarter of 2013, due primarily to higher firm natural gas sales as a result of colder weather, as well as the addition of new natural gas heating customers.


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A summary of our retail electric GWh sales and percentage changes, as well as percentage changes in CL&P, NSTAR Electric, PSNH and WMECO retail electric GWh sales, is as follows:

For the Three Months Ended March 31, 2014 Compared to 2013

                     Sales (GWh)          Percentage
NU - Electric      2014        2013        Increase
Residential         6,139       5,803              5.8 %
Commercial (1)      6,866       6,695              2.6 %
Industrial          1,343       1,298              3.4 %
Total              14,348      13,796              4.0 %

For the Three Months Ended March 31, 2014 Compared to 2013

                                NSTAR
                    CL&P       Electric       PSNH        WMECO
                                                        Percentage
                 Percentage   Percentage   Percentage   Increase/
Electric          Increase     Increase     Increase    (Decrease)
Residential             6.9 %        4.1 %        5.8 %        5.7 %
Commercial (1)          2.3 %        2.6 %        2.3 %        4.2 %
Industrial              4.2 %        3.5 %        4.8 %       (2.4 )%
Total                   4.7 %        3.2 %        4.2 %        3.8 %



(1) Commercial retail electric GWh sales include streetlighting and railroad retail sales.

A summary of our firm natural gas sales in million cubic feet and percentage changes, as well as percentage changes in Yankee Gas and NSTAR Gas, is as follows:

                                                For the Three Months Ended
                                             March 31, 2014 Compared to 2013
                                       Sales (million cubic feet)       Percentage
NU - Firm Natural Gas                     2014             2013          Increase
Residential                                 19,812           17,015             16.4 %
Commercial                                  19,627           16,771             17.0 %
Industrial                                   7,478            6,829              9.5 %
Total                                       46,917           40,615             15.5 %
Total, Net of Special Contracts (1)         45,550           39,422             15.5 %




                                          For the Three Months Ended
                                       March 31, 2014 Compared to 2013
                                          Sales (million cubic feet)
                                        Yankee Gas          NSTAR Gas
                                        Percentage         Percentage
Firm Natural Gas                         Increase           Increase
Residential                                      21.8 %             12.9 %
Commercial                                       21.0 %             13.6 %
Industrial                                       10.2 %              7.7 %
Total                                            18.6 %             12.7 %
Total, Net of Special Contracts (1)              18.9 %



(1) Special contracts are unique to the customers who take service under such an arrangement and generally specify the amount of distribution revenue to be paid to Yankee Gas regardless of the customers' usage.

Weather, fluctuations in energy supply costs, conservation measures (including company-sponsored energy efficiency programs), and economic conditions affect customer energy usage. Industrial sales are less sensitive to temperature variations than residential and commercial sales. In our service territories, weather impacts electric sales during the summer and electric and natural gas sales during the winter (natural gas sales are more sensitive to temperature variations than electric sales). Customer heating or cooling usage may not directly correlate with historical levels or with the level of degree-days that occur. In addition, our electric and natural gas businesses are susceptible to damage from major storms and other natural events and disasters that could adversely affect our ability to provide energy.

Our first quarter 2014 consolidated retail electric sales, consisting of the retail electric sales of CL&P, NSTAR Electric, PSNH, and WMECO, were higher, as compared to the first quarter of 2013, due primarily to colder weather. First quarter 2014 heating degree days were 16 percent higher in Connecticut and western Massachusetts, 12 percent higher in the Boston metropolitan area, and 15 percent higher in New Hampshire, as compared to the first quarter of 2013. Weather-normalized retail electric sales (based on 30-year average temperatures) increased 1.3 percent in the first quarter of 2014, as compared to the first quarter of 2013, reflecting a steady improvement in economic conditions across our service territory.


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For WMECO, fluctuations in retail electric sales do not impact earnings due to the DPU-approved revenue decoupling mechanism. Under this decoupling mechanism, WMECO has an overall fixed annual level of distribution delivery service revenues of $132.4 million, comprised of customer base rate revenues of $125.4 million and a baseline low income discount recovery of $7 million. These two mechanisms effectively break the relationship between sales volume and revenues recognized.

Our firm natural gas sales are subject to many of the same influences as our retail electric sales. In addition, they have benefitted from historically favorable natural gas prices and customer growth across both operating companies. Our first quarter 2014 consolidated firm natural gas sales, consisting of the firm natural gas sales of Yankee Gas and NSTAR Gas, were higher, as compared to the first quarter of 2013, due primarily to colder weather. The first quarter 2014 weather-normalized NU consolidated total firm natural gas sales increased 3.6 percent, as compared to the same period in 2013, due primarily to residential and commercial customer growth.

NU Parent and Other Companies: NU parent and other companies, which includes our competitive businesses, had net losses of $3.2 million in the first quarter of 2014, compared with earnings of $5.4 million in the first quarter of 2013. Excluding the impact of integration costs, NU parent and other companies earned $2.6 million in the first quarter of 2014, compared with $7.2 million in the first quarter of 2013. The decrease in earnings was due to the absence of the favorable impact from the resolution of the state income tax audit in the first quarter of 2013, which provided a $6.7 million benefit to first quarter 2013 NU parent earnings.

Liquidity

Consolidated: Cash and cash equivalents totaled $89.2 million as of March 31, 2014, compared with $43.4 million as of December 31, 2013.

On January 2, 2014, Yankee Gas issued $100 million of 4.82 percent Series L First Mortgage Bonds, due to mature in 2044. The proceeds, net of issuance costs, were used to repay the $75 million 4.80 percent Series G First Mortgage Bonds that matured on January 1, 2014 and to repay $25 million in short-term borrowings.

On March 7, 2014, NSTAR Electric issued $300 million of 4.40 percent debentures, due to mature in 2044. The proceeds, net of issuance costs, were used to repay the $300 million of 4.875 percent debentures that matured on April 15, 2014.

On April 24, 2014, CL&P issued $250 million of 4.30 percent 2014 Series A First Mortgage Bonds, due to mature in April 2044. The proceeds, net of issuance costs, were used to repay short-term borrowings.

NU parent, CL&P, PSNH, WMECO, NSTAR Gas and Yankee Gas are parties to a joint five-year $1.45 billion revolving credit facility due to expire on September 6, 2018. The revolving credit facility is to be used primarily to backstop the $1.45 billion commercial paper program at NU. The commercial paper program allows NU parent to issue commercial paper as a form of short-term debt. As of March 31, 2014 and December 31, 2013, NU had approximately $818.5 million and $1.01 billion, respectively, in short-term borrowings outstanding under the NU parent commercial paper program, leaving $631.5 million and $435.5 million of available borrowing capacity as of March 31, 2014 and December 31, 2013, respectively. The weighted-average interest rate on these borrowings as of March 31, 2014 and December 31, 2013 was 0.23 percent and 0.24 percent, respectively, which is generally based on money market rates. As of March 31, 2014, there were intercompany loans from NU of $351.6 million to CL&P, $39.9 million to PSNH and $37.4 million to WMECO. As of December 31, 2013, there were intercompany loans from NU of $287.3 million to CL&P and $86.5 million to PSNH.

NSTAR Electric has a five-year $450 million revolving credit facility due to expire on September 6, 2018. This facility serves to backstop NSTAR Electric's existing $450 million commercial paper program. As of March 31, 2014, NSTAR Electric had no borrowings outstanding under its commercial paper program. As of December 31, 2013, NSTAR Electric had $103.5 million in short-term borrowings outstanding under its commercial paper program, leaving $346.5 million of available borrowing capacity. The weighted-average interest rate on these borrowings as of December 31, 2013 was 0.13 percent, which is generally based on money market rates.

Cash flows provided by operating activities totaled $493.8 million in the first quarter of 2014, compared with $473.1 million in the first quarter of 2013. The improved operating cash flows were due primarily to the absence of cash disbursements for major storm restoration costs and the decrease of $40.3 million in Pension and PBOP Plan cash contributions, partially offset by an increase in income taxes paid in the first quarter of 2014 ($82.6 million), as compared to the first quarter of 2013 ($22.2 million), and the absence of costs recovered in rates related to the RRBs that were fully amortized in the first half of 2013.

On March 28, 2014, CYAPC and YAEC received payment of $163.3 million of the DOE Phase II Damages proceeds. It is anticipated that in the second quarter of 2014, the Yankee Companies will complete the FERC review process and return these amounts to the member companies, including CL&P, NSTAR Electric, PSNH, and WMECO, for the benefit of their respective customers. As a result of the consolidation of CYAPC and YAEC, the cash received was included in Other Long-Term Assets on the NU consolidated balance sheet pending refund as of March 31, 2014 and in Proceeds from DOE Damages Claim with an offset in Deferred DOE Proceeds on the NU consolidated statement of cash flows for the three months ended March 31, 2014. These proceeds had no impact on NU's earnings or net cash flows provided by operating activities for the three months ended March 31, 2014.

On January 31, 2014, Moody's upgraded corporate credit and securities ratings of NU, CL&P and PSNH by one level and WMECO by two-levels. On April 7, 2014, Fitch affirmed the corporate credit ratings and outlook of NU, CL&P, NSTAR Electric, PSNH, WMECO and NSTAR Gas. On April 25, 2014, S&P affirmed the corporate credit ratings and revised the outlooks to positive from stable of NU, CL&P, NSTAR Electric, PSNH, WMECO, Yankee Gas and NSTAR Gas.


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In the first quarter of 2014, we had cash dividends on common shares of $118.5 million, compared with $116.4 million in the first quarter of 2013. On February 4, 2014, our Board of Trustees approved a common dividend payment of . . .

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