Northeast Utilities' CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb.25.11 | About: Eversource Energy (ES)

Northeast Utilities (NU) Q4 2010 Earnings Call February 25, 2011 1:00 PM ET

Executives

Charles Shivery - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Leon Olivier - Chief Operating Officer, Executive Vice President and Chief Executive Officer of Western Massachusetts Electric Company

David McHale - Chief Financial Officer and Executive Vice President

Jeffrey Kotkin -

Analysts

Paul Patterson - Glenrock Associates

Christopher Ellinghaus - Wall Street Access

Jonathan Arnold - Deutsche Bank AG

James Dobson - Wunderlich Securities Inc.

Operator

Welcome to the Northeast Utilities Q4 2010 Earnings Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. Jeffrey Kotkin. Mr. Kotkin, you may begin.

Jeffrey Kotkin

Thank you very much, John. Good afternoon and thank you for joining us. I'm Jeff Kotkin, NU's Vice President for Investor Relations. Speaking today will be Chuck Shivery, NU's Chairman, President and Chief Executive Officer; Leon Olivier, NU's Executive Vice President and Chief Operating Officer; and David McHale, NU Executive Vice President and Chief Financial Officer. Also joining us today are Jim Muntz, President of our Transmission group; and Jay Buth, our Controller.

Before we begin , I'd like to remind you that of the statements made during this investor call may be forward-looking as defined within the meaning of the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties, which may cause the actual results to differ materially from forecasts and projections. Some of these factors are set forth in the news release issued yesterday. If you have not seen that news release, it is posted on our website at www.nu.com. Additional information about the various factors that may cause actual results to differ can be found in our annual report on Form 10-K for the year ended December 31, 2009, and our Form 10-Q for the third quarter of 2010. Additionally, our explanation of how and why we use certain non-GAAP measures is contained within our news release and in our most recent 10-Q and 10-K.

Now I will turn the call over to Chuck.

Charles Shivery

Thanks, Jeff. And I'd like to thank everybody for joining us this afternoon. From all aspects, 2010 was a very good year for Northeast Utilities, its customers and its shareholders. David will cover the financial details of the quarter and the year, but I'd like to hit the year's high points.

Earnings for the year were well beyond our initially projected range of $1.80 to $2 per share. That was due to a combination of factors, including strong cost control, sound operations, a hot summer and the impact of midyear rate decisions. Earnings growth last year exceeded our 6% to 9% long-term growth rate, and we continue to increase our dividend at a rate that is faster than the industry average.

As you know, earlier this month, our Board of Trustees approved a 7.3% increase in the dividend to an annualized amount of $1.10 per share, the 11th consecutive year we have had a dividend increase that exceeds the industry average.

In terms of how we serve our customers, we continue to see a number of successes. The benefits to customers from the transmission upgrades we completed in Southwest Connecticut has saved electric customers more than $600 million since they were completed. We continue to invest more than $400 million annually, improving the reliability of our three state electric distribution system. Our new customer information system has allowed us to dramatically improve our response rate to customer inquiries.

Our communities benefit from the improved reliability of our facilities; property tax revenue generated by our new equipment; by our employment levels, which have remained steady; and by our corporate philanthropy, which reached record levels of nearly $5 million in 2010. Heeding the call of Connecticut's new Governor Malloy, we are ensuring that the state is open for business by improving our reliability, streamlining our processes and implementing some of the most aggressive energy conservation programs in the country. In 2010, CL&P's energy conservation expenditures totaled approximately $120 million, including $43 million invested in the commercial and industrial sectors. In Transmission, we received final approval of the Greater Springfield Reliability Project this past fall and have already begun construction, and ISO New England confirmed the need for the Interstate Reliability Project. In addition, we received strong remarks for the operation and security of our transmission system.

On February 11, FERC approved the Transmission Services Agreement associated with our new Northern Pass transmission line to import power from Hydro-Québec. That approval was a significant next step in the process. FERC recognized our TSA, the product of more than a year of negotiations, as uniquely beneficial to our region. It approved our requested initial Return on Equity of 12.56%, our requested 50% equity, 50% debt capital structure and our fully tracking cost recovery tariff.

We expect the Northern Pass line to commence operation by the end of 2015 and immediately provide New England's electric customers with an attractive combination of economic benefits, a significant reduction in fossil fuel consumption and a very real reduction in New England's greenhouse gas emissions. We will provide you with a summary of our work as we continue to move this project forward.

On the distribution spot side, despite an unusual level of storm activity and a very hot summer, we maintained a reliable system, improved our customer service metrics and significantly reduced our uncollectible balances. We also secured approvals from our Connecticut and New Hampshire regulators to continue to invest heavily to replace our aging distribution infrastructure and completed half of a new gas pipeline linking our LNG facility in Waterbury with a significant load center in the Wallingford/Cheshire area. The project will reduce gas congestion on the Yankee Gas system and help our customers lower their fuel costs and emissions.

On the generation side, we continue to make significant progress on PSNH's Clean Air Project at Merrimack Station, brought online our first solar facility in Massachusetts and announced the location of a second site for a larger solar facility.

And on the strategic side, we announced our transformative merger with NSTAR and have filed all of the regulatory applications which must be approved before we close. The shareholder vote on the merger is continuing to progress. Proxy advisory firms have recommended NU shareholder approval, and the special holder meetings for both companies are set for March 4, a week from today.

The mandatory waiting period under Hart-Scott-Rodino Act has expired, and FCC approval has been secured. We expect other Federal reviews before the FERC and the NRC to be smooth. Our application for approval of the merger was filed late last year with the Massachusetts Department of Public Utilities, and the discovery process continues. The DPU is currently reviewing various filings on the standard of review it should utilize in reviewing the merger. We and NSTAR firmly believe that this standard should remain a "no net harm" standard that has served the state well for about 60 years. Once the DPU makes this determination on the appropriate standard of review, we expect it will reestablish a schedule for the conclusion of the case. At that time, though there is no statutory deadline, we expect the DPU to be in a position to vote on the merger by the end of the third quarter.

In Connecticut, we continue to believe that regulatory approval is not necessary and remain hopeful that the DPUC will reaffirm in the near term their prior conclusion that they do not have jurisdiction over the merger. Oral arguments occurred a week ago on the earlier DPUC draft decision, which concluded that since there was no change of control in Northeast Utilities, CL&P or Yankee Gas, DPUC approval was not required. In addition to the oral argument, the DPUC will hold a public informational hearing on the merger in the near future.

You may be aware that a bill has been raised in the Connecticut legislature that would confer DPUC jurisdiction over mergers such as ours. While we have not yet seen a detailed description of that bill, we nonetheless believe that such an approach would not serve the best interest of the state.

We have formed the integration teams that will develop recommendations on how the two companies should be merged, so we can fulfill our commitment to our customers, our communities and our investors, that they will benefit from this business combination. We believe this merger will be a pathway for both companies to implement best practices in a cost-effective way that can result in better service at a lower cost than each could provide on a standalone basis. We believe the combined businesses can offer investors a compelling opportunity to invest in a company that offers earnings and dividend growth better than most of our peers. Together, we expect that a combined NU and NSTAR can provide long-term cumulative annual earnings growth at the higher end of the 6% to 9% range we have targeted for NU on a standalone basis.

Now I'd like to turn the call over to Lee.

Leon Olivier

Thank you, Chuck. Overall, we had a very good year operationally, despite a very significant increase in storm activity over both 2009 and historic levels. We experienced 39 major storms in 2010 as compared with 19 in 2009 and expensed about $30 million in costs, more than double our budget of $14 million. We were, however, able to successfully offset $16 million of higher storm-related expenses through rigorous cost controls and strong uncollectible expense performance.

Aside from those storms and some very high peak loads throughout the summer, our system performed well throughout the year. System reliability clearly benefited from the capital investments we have made in recent years and from our strong focus on preventative maintenance.

Turning to generation, our baseload units, which include our renewable woodchip burning northern wood power plant operated reliably and achieved an 81% capacity factor. Our large incineration project currently underway, PSNH's Merrimack Clean Air Project, is currently 82% complete and on schedule to begin operation in mid-2012. The $430 million project involved installing a wet scrubber at our two-unit Merrimack coal-fired station?

Through December 31, PSNH has capitalized nearly $300 million associated with the project, about half of which was capitalized in 2010. In Massachusetts, WMECO commenced operations of its first solar energy facility in October 26 located on a brownfield site in Pittsfield with 1.8-megawatt facilities as the largest in New England. In January, WMECO announced its plan to develop a second and larger project located on a capped landfill in Springfield. We believe this site can accommodate 4.2 megawatts of power, and the major permitting and procurement activities for this project are underway. Assuming a favorable outcome, we would begin construction in the second quarter of 2011. The cost associated with both solar facilities, including the authorized Return on Equity, will be recovered through a fully tracking rate mechanism.

With respect to 2011, we are seeing heavier weather-related natural gas loads. Yankee Gas has had record commodity send outs on both January 23 and 24. Send out on January 24 was nearly 351 million BTUs, which eclipsed the previous day's record by more than 4%. You've probably noticed that Firm Natural Gas sales rose by 9.1% in the fourth quarter of 2010 compared with the same period of 2009 due to both colder weather and the attraction of natural gas prices in this current energy environment. We expect to see strong sales from the first quarter of 2011 relative to 2010 as well, largely as a result of much colder January and February temperatures. David will discuss some of the specifics on the Yankee Gas rate case that we filed last month, but a key aspect of the case is our capital investment program. Yankee Gas invested nearly $95 million in its system in 2010, of which $26.6 million was invested in the Waterbury-to-Wallingford pipeline, which will improve reliability and meet increasing demand for natural gas in this area. Approximately 10 miles of the 16-mile line extension, including the Naugatuck River Crossing is complete. And the line extension between Wallingford and Cheshire went into service in November. The remainder of the project, which involves increasing vaporization output of Yankee's Waterbury LNG facility and connecting it to the new line should be complete by this November. We recently reduced our total estimated cost of the project from $63 million to $57.6 million due to a combination of factors, including lower labor cost, lower-than-expected contractor bids on our LNG upgrade bringing that project into rates and increasing the scale of our programs to replace older cast iron and bare steel gas mains, our core elements of our rate case recently filed.

Turning to Western Mass Electric, a key element of our 2010 rate case was our proposal to increase distribution capital spending from approximately $30 million annually to about $50 million annually to better address aging infrastructure. In its decision, which was effective this month, the DPU denied our proposed capital investment tracking mechanism. As a result, Western Mass Electric will not increase its current level of distribution capital expenditures.

Turning to transmission, we continue to forecast capital expenditures of $445 million in 2011, up significantly from the $261 million we invested in our transmission system in 2010. That increase primarily reflects increased investment in our $795 million Greater Springfield Reliability Project, which we began building in December. Major overhead construction will begin this spring, and we continue to target a late 2013 in-service date for the project. The Greater Springfield project is by far our largest project associated with the New England East-West Solutions family of transmission upgrades. We and National Grid are targeting the second half of 2011 for filing our siting applications associated with the Interstate Reliability Project. That project will run from Eastern Connecticut through Northwestern Rhode Island and into Massachusetts. Our Connecticut section is expected to cost approximately $300 million.

In late 2010, ISO New England planners confirmed the need for the interstate. Though same plans continue to review the date of need for the third major leg of news the Central Connecticut Reliability Project. We believe ISO will complete a preliminary needs assessment this fall.

Earlier, Chuck discussed FERC's approval of the transmission services agreement we signed with an affiliate of Hydro-Québec. We filed for two other approvals in October. We filed with the U.S. Department of Energy for our presidential permit and with ISO New England for a technical approval of the line. Last week, we updated the presidential permit application to identify a location in Pittsburg, New Hampshire, as our preferred option for where the lines should cross the Canadian-U.S. border. We are close to filing our U.S. Forest service application and expect to make an additional application within the New Hampshire Siting Evaluation Committee and various Federal agencies early next year and to have the line fully permitted by early 2013. We have set up an office in Northern New Hampshire to better enable us to work with the community and the landowners along the project route. We continue to forecast completion of the line by the end of 2015.

NU's 75% share of the $1.1 billion project is approximately $830 million, as you know, went to our merger with NSTAR occurs in new share will be 100%.

Now I would like to turn the call over to David.

David McHale

Thank you, Lee. As Chuck indicated earlier, 2010 was a good year financially for the company. We earned $387.9 million or $2.19 per share compared with earnings of $330 million or $1.91 per share in 2009. Excluding the non-recurring impacts of the parent company tax settlement and merger-related expenses, we earned $2.16 per share in 2010. That level is consistent with the guidance of $2.10 to $2.20 per share that we gave at the Edison Electric Financial Conference last November.

This year on a standalone basis, we are projecting earnings per share of between $2.25 to $2.40, excluding approximately $0.15 per share of expected merger-related costs. Those earnings are consistent with our projected long-term EPS growth rate of 6% to 9%. And they reflect the earnings power related to the capital expenditure and rate base projections we provided to you at EEI in November as well. We recognize that this guidance is clearly above consensus, which seems to be harboring around $2.25 per share. And speaking to several of you prior to the call, we sense that some of this difference may be related to the benefits of additional cash flow resulting from bonus depreciation, a lower effective tax rate, which we view to be about 35%, a higher level of equity capitalization within our companies and our continued focus on cost control.

I'll spend more time on 2011 in a moment and break this down for you by segment, but let me start with the details behind 2010 results. We earned $129.3 million or $0.73 per share in the fourth quarter of 2010 compared with earnings of $84.7 million or $0.48 per share in the fourth quarter of 2009. The most significant improvement was in our Distribution segment, which earned $206.2 million in '10 compared with $159.2 million in 2009. That improvement was concentrated in the second half of the year and resulted from a combination of factors, including the implementation of distribution rate decisions at CL&P and PSNH, hotter summer weather and colder December temperatures, and some significant progress we made in cost management, particularly in reducing our uncollectibles expense. These factors were particularly meaningful in the fourth quarter of 2010, when our Distribution segment earned $75.5 million compared with $39.2 million in 2009. These factors are also helping to position our distribution companies to improve their earned Return on Equity levels.

CL&P's Distribution segment earned $39.9 million in the fourth quarter of '10 compared with $19 million in the fourth quarter of 2009. It earned $91.1 million for the full year of 2010 compared with $74 million for the year 2009. Revenues didn't necessarily drive the improvement in financial performance since CL&P's distribution rate increase did not take effect until January 1, 2011. Rather, both fourth quarter and full year improvements were due to a combination of lower depreciation and operating expense, both the result of CL&P's rate case decision and lower uncollectible expense due to significant progress we've made in this area and the benefits of tax settlements. These improvements were partially offset by higher storm and pension expense.

For the year, CL&P's electric sales were up 1.8% over 2009, although they were down 1.8% on a weather-adjusted basis. For the full year, CL&P improved its Distribution segment regulatory ROE from 7.3% in 2009 to 7.9% in 2010. In 2011, we expect CL&P to experience further improvement in its ROE, and we expect to earn in the 9% area.

CL&P's allowed return is 9.4% as a reminder. PSNH's Distribution and Generation segment earned $17.8 million in the fourth quarter of 2010 compared with $11.3 million in the fourth quarter of 2009 and $69.3 million for the full year of 2010 compared with $47.5 million for the full year 2009. PSNH benefited from the distribution rate increases that we're effective in August of 2009 and July of 2010, as well as from higher AFUDC earnings on $430 million Clean Air Project. You may recall that in addition to PSNH's permanent distribution rate increase, the company will collect approximately $13.7 million from July 2010 through June 2011

to recruit revenues it did not receive during the 11 months that temporary rates were in effect. Partially, as a result of those additional revenues, PSNH's combined Distribution and Generation segment regulatory ROE for 2010 was 10.2%, the recruitment period will end in June 2011, and for the full year 2011, we are projecting a combined Distribution and Generation segment regulatory ROE in the area of 9%.

For the year 2010, PSNH's sales were up 1.3% over '09, although they were down 1.8% on a weather-adjusted basis. Western Mass Electric Company, their Distribution segment earnings were $1.2 million in the fourth quarter of 2010, down about $2 million from the fourth quarter of 2009, primarily due to a $2.1 million charge resulting from the Massachusetts DPU's January 31 rate decision. For the year, Western Mass Electric Distribution segment earned $10.1 million compared to $16.7 million in 2009. While WMECO did see sales growth of more than 2% in both the fourth quarter and full year 2010 compared with '09, higher operating expenses in the aforementioned fourth quarter charge more than offset the additional revenue. As expected, WMECO's distribution segment ROE was off significantly in 2010. They earned 4.6% for the year compared with 8.4% in 2009.

As you probably saw on January 31, the Massachusetts DPU approved an annualized distribution rate increase of $16.8 million for the company that was effective this month. While it was less than $28.4 million initial request, we expect it will allow WMECO's earnings to recover in this year. We are currently projecting a Distribution segment regulatory ROE in the area of 9% for WMECO in 2011 compared with the DPU-authorized level of 9.6%. I should also note that in addition to the rate increase, the DPU approved WMECO's sales decoupling proposal and our pension tracking mechanisms remain in place.

Yankee Gas earned $16.6 million in the fourth quarter of 2010 compared with $5.7 million in the fourth quarter of '09. For the full year, Yankee Gas earned $32.7 million compared with $21 million for all of 2009. The principal drivers for Yankee Gas 2010 earnings improvement were sales and significantly lower uncollectible expense. Yankee Gas firm sales rose 9.1% in the fourth quarter of 2010 compared with the fourth quarter of 2009. And while a colder month of December compared with '09 helped, weather-adjusted sales still rose by 6.3% for the quarter. For the full year, despite a mild first quarter, Yankee Gas firm sales were up 1.9% compared with 2009. On a weather-adjusted basis, firm sales were up 6.2% for the year.

Improvements we made in collecting overdue bills were particularly helpful for Yankee Gas, where a pretax uncollectible expense that affects earnings declined by about $10 million in the fourth quarter alone and $15.7 million for the year. In 2010, Yankee Gas earned a regulatory ROE of 8.6% compared with an authorized level of 10.1%. Yankee Gas filed a rate case the Connecticut DPUC last month seeking a $32.8 million increase in base rates effective July 1, 2011, and another $13 million increase effective July 1, 2012. The primary reason for the application is to reflect in rates our continued high level of investment in the Yankee Gas system, the increase in investment is somewhat offset by increasing sales and lower uncollectible expense, but additional rate increases are still needed to recover investments like the Waterbury-to-Wallingford project.

In the January filing, Yankee Gas asked to maintain it's currently allowed regulatory ROE of 10.1% and is scheduled to receive a decision in the case in June. Hearings are scheduled for March.

Overall, we are earned $1.16 per share in our Distribution and Generation segment in 2010. And in 2011, we expect that segment to earn between $1.25 and $1.35 per share. There are a number of key factors built into the projection in addition to the rate case decisions we have already received. We expect continued economic recovery, and for the first time in three years, we are not projecting sales declines. With that said, we see retail sales at essentially flat to 2010 on a weather-adjusted basis. Recall that over the past three years, weather-adjusted electric sales were down by more than 2% annually.

We also foresee increased employee benefit expenses and are assuming that untracked pension and healthcare expense primarily related to the Distribution segment rises about $0.11 per share in 2011 compared with '10. Other untracked O&M is expected to rise about 2% overall or $0.04 per share.

Now turning to Transmission. The segment earned $50.5 million in the fourth quarter of '10 compared with $44.4 million in the fourth quarter of 2009. For the full year 2010, our Transmission segment earned $177.8 million compared with $164.3 million in 2009. The improvement was primarily due to the ongoing investment in our transmission system. Our transmission rate base totaled $2.76 billion at the end of 2010 compared with $2.6 billion at the end of '09, an increase of about $160 million or more than 6%.

For 2011, Transmission segment earnings guidance is $1.05 to $1.10 per share, with earnings growth driven primarily by construction of the Greater Springfield Reliability Project. By year end we transmission rate base growing to $2.93 billion, up 6.3% over year-end '10. Our competitive businesses earned $8.3 million in 2010 compared with $15.8 million in 2009. This in part reflects expected lower operating results and mark-to-market gains in 2010. In terms of earnings guidance going forward, we'll merge our competitive businesses into our parent and other company guidance. This reflects the progressively smaller impact that our competitive businesses will have on our financial performance in future years.

Finally, in relation to NU parent and other companies, when we reported our results last evening, we singled out the $6.3 million net positive impact related to a tax settlement we reached in the fourth quarter of 2010 net of our merger-related expenses. The tax settlement was a nonrecurring item that added $15.7 million to earnings in the quarter. The merger-related expenses totaled $9.4 million after tax. Excluding those impacts, we recorded after-tax parent expenses of $3.6 million in the fourth quarter of 2010 and $10.7 million for the full year, which was consistent with our previous earnings guidance. These figures are similar to what we recorded in 2009.

In 2011, we project net after-tax, parent and other expenses of $0.05 per share, excluding merger-related expenses. At this time, we are projecting just under $30 million of after tax merger expenses in 2011, assuming the merger closes this year. That would amount to about $0.15 per share based on our current outstanding common share count. All of the 2011 guidance figures are on a standalone basis.

From earnings, let me turn to a few balance sheet and cash flow items. As the result of our strong performance in 2010, total common shareholder equity levels rose by about $230 million to just over $3.8 billion during the year. Over the same period, our total debt levels rose about $300 million to just under $5 billion. So our total debt represented about 56% of our total capitalization at the end of 2010, excluding rate reduction bonds. This level is well below the 60% level of debt total capitalization to which we have managed our capital structure in recent years.

One reason for the strength of our balance sheet is the improving cash flow profile. In 2010, operating cash flows after retirement of rate reduction bonds totaled $833 million compared with $745 million in 2009. An important cash flow item going forward relates to the impact of bonus depreciation in the 2010 federal tax bill. We expect those provisions to add a total of about $250 million to cash flow in 2011 alone and about $450 million to $550 million to cash flow over the three-year period in 2011 through 2013. As a result, we anticipate net cash flows from operation after retirement of rate reduction bonds to total between $950 million and $1 billion in 2011.

In terms of specific earnings impacts in 2011, the increased cash flows should reduce interest expense by about $5 million after tax. That will be only partially offset by a $2 million reduction in earnings as a result of a lower rate base. So there is a net favorable impact of bonus depreciation of about $3 million or $0.02 a share this year.

In terms of a longer-term impact, we'll be updating our standalone, five-year capital expenditures and related rate base figures in our 10-K, which we anticipate filing later today. Although you'll find that total projected rate base by the end of 2015 is down by about $500 million or 4%, the vast majority of the impact is in the Distribution segment. And even with this update, we feel very strongly that we can achieve our projected 6% to 9% compounded annual EPS growth rate in part because we will use this additional cash flow to offset a significant amount of planned external debt and equity capital raise.

In terms of financing activity, 2011 cash flow will fund a vast majority of our capital expenditures, which we continue to project to be approximately $1.2 billion this year on a standalone basis. As a result, we are projecting only two new long-term debt issuances, both of them later this year. We have regulatory approval to undertake both of those issuances: $160 million of new bonds at PSNH and $100 million of senior notes at Western Mass Electric. And we have no debt maturities this year, and our bank lines have been extended through September of 2013.

Our cash flow estimates are net of our increasing contributions to our pension plan. In 2010, we contributed $45 million to the plan. In 2011, we expect to contribute about $145 million to the plan. We had earlier projected $200 million of contributions in '11, but we lowered that figure due to a number of factors, including the strong performance of the assets in our plan. Where in 2010, we saw a 16.75% return.

Also helping cash flows will be the impact of the CL&P 2010 distribution rate increase. You may recall that while the $63.4 million 2010 rate increase was effective July 1, 2010, the impact on customers was deferred until January 1, '11, so that its implementation could correspond to a sharp decline in our competitive transition assessment charge or CTA. The decline in the CTA was the result of CL&P making the final principal and interest payment in December of 2010 on more than $1.4 billion of rate reduction bonds that were issued in 2001. The RRB payments were pass-through costs, so their drop-off does not affect our cash flows. However, the average $0.05 a kilowatt hour increase in the distribution charge effective January 1 will increase CL&P's cash generation in 2011 without customers seeing an increase in the overall electric rates. In fact, because of the declining commodity prices, CL&P's residential and small commercial customers who remain on standard service experienced a 7.8% decline in their overall bill in January.

Thank you again for your time. Now let me turn the call back to Jeff Kotkin.

Jeffrey Kotkin

Thank you very much, David. And I'm going to turn the call back to John to remind you how to log in any questions. John, if you could pick up right now?

Question-and-Answer Session

Operator

[Operator Instructions]

Jeffrey Kotkin

Our first question this afternoon is from Jonathan Arnold from Deutsche Bank.

Jonathan Arnold - Deutsche Bank AG

I had a couple of things, but firstly, you mentioned a strong weather in January and February in the gas business, but then you didn't mention it as one of the factors in guidance being versus where the street's been. So is it fair to assume that that's something that might put you higher, within the range or is it something that's kind of in the range?

David McHale

I assume you're talking about the new 2011 guidance? We're kind of normalizing for the weather effect thinking that there is flat sales going forward, not clear to us what the market was expecting by way of kind of year-over-year gas or power sales. Maybe that accounts for some of that, but we're normalizing for the sales, so were not starting from that higher level that we achieved in 2010.

Jonathan Arnold - Deutsche Bank AG

But in terms of the weather you've seen so far in 2011, is that normalized out of the guidance range?

David McHale

I would say that's normalized our. It may be worth a little bit. We saw some pretty good gas margins in January, in particular. We got a little bit of weather sort of at our back here in February, but it's probably worth a little bit. But that's not what's driving our view around the guidance this year.

Jonathan Arnold - Deutsche Bank AG

It's in there, but it's not that material?

David McHale

Right.

Jonathan Arnold - Deutsche Bank AG

You talked about thinking that Massachusetts might take until maybe the end of the third quarter to get to a vote on the merger. So my question is, in some of the commentary out of the legislature in Connecticut, they talked about wanting to keep an eye on what may or may not come out of the Massachusetts review. Do you think that that's a decision that the Connecticut case will ultimately come after Massachusetts or do they might just move forward before Massachusetts gets wrapped up?

Charles Shivery

Jonathan, this is Chuck. As you know, Massachusetts has jurisdiction over the merger, so there has to be a case in Massachusetts where they make a decision on the merger. We don't believe that Connecticut in fact has jurisdiction. So far, the DPUC, at lease in their draft order, has agreed with that. I think you do know that there was oral arguments earlier this week on that particular issue. And in Connecticut, there will be an informational hearing, much like the informational hearing that we had in New Hampshire. That hearing has not yet been scheduled in Connecticut. If that just simply proceeds along, we don't think Connecticut would then be a constraining issue on the merger approval time line.

Jonathan Arnold - Deutsche Bank AG

Did you see them kind of getting to a definitive decision on jurisdiction ahead of Massachusetts wrapping up that case?

Charles Shivery

It's hard to project that, but I would think that the process in Connecticut, at least around jurisdiction, is moving along reasonably well. Chairman DelGobbo did say he was continuing to see what was going on in other jurisdictions, so I think -- there are a lot of moving parts right now, but I think both of the processes in both Massachusetts and Connecticut and in New Hampshire, for that matter, are moving along well.

Jeffrey Kotkin

Our next question is from Jay Dobson from Wunderlich.

James Dobson - Wunderlich Securities Inc.

I'll throw it to Chuck, and he can hand it out to the group. First on O&M, clearly a good year in 2010. How much of that should be extrapolating forward? And, sort of, what's your view on operating costs and let's continue to think in the standalone basis?

Charles Shivery

I will do just that, I'll agree with you. We did a great job in managing cost in 2010. And obviously, we're looking at continuing that strong cost management in 2011. I'll turn it over to David. See if he wants to make any specific comments.

David McHale

I mentioned this in the script. There's always a differential online between core O&M and, say, the employee benefits and employee cost. And we know that those things -- and some of those are formulaic as we calculate things like pension expense -- are going to put a little bit of pressure on our numbers. And that I quoted it as being $0.11. So if you look at both pension and employee benefits, now a good share of that, a healthy amount of that was covered in the revenues that we received in the rate cases. You've got to sort of put that into the model, too. But away from that, if you just look at what's happening with core O&M, I mentioned that we are up about 2%. So that's sort of our run rate, knowing, too, that there's going to be a kind of labor inflation of about 3% in the organization. But good progress managing the overall core business, we made great progress in 2010 around uncollectible expense. We're not going to be able to replicate that year-over-year, but I think we've got a pretty good beat on collectible expense. I don't see a lot of inflation up there or a lot of upward pressure there. But 2% is sort of the run rate that we're looking at this year.

James Dobson - Wunderlich Securities Inc.

David, pension expense for 2011, do you see any benefit there or should we be just about flat with the run rate from '10?

David McHale

Pension expense is definitely going up, particularly as we continue to amortize the losses, really, from 2008. So you'll see this upward trajectory, and I'd be surprised if that is unique to Northeast Utilities and our system companies. So we'll experience that, but that's all embedded in the $0.11, Jay, that I quoted.

James Dobson - Wunderlich Securities Inc.

And then, Chuck, back to Northern Pass, just great getting the TSA behind us. And now what about what about the PPA?

Charles Shivery

Well, Jay, I think -- first of all, I agree with you. Getting the TSA behind us was a very significant step forward in this whole approval process. But I think we've chatted in the past with you that there is not a requirement to have PPAs in the place, at least form Hydro-Quebec standpoint, on order to continue to move forward with this. We do expect to do something in New Hampshire around the PPA, but we don't have PPAs to pay the full amount of the energy coming from Hydro-Québec for us to move forward.

Jeffrey Kotkin

Our next question is from Ashar Khan from Vizium.

Unidentified Analyst

David, you gave a lot of numbers. Could you just go over what ROE in the '11 guidance is by each jurisdiction like CL&P and Massachusetts and New Hampshire? I apologize, I missed some of the numbers.

David McHale

Basically what we're saying is for both PSNH, which as you know, we kind of talk about is both as Distribution and Generation business, CL&P distribution and then Western Mass Electric distribution. We're saying they're in the area of 9% for all of those. You can make a determination of whether that's getting us that kind of midpoint high end, low end, but that is kind of where we feel right now. We stopped short of giving a specific number around Yankee, predominantly because we're in the middle of this rate case there. We've asked for a 10.1%, and we'll be driving towards a decision a little bit later this Spring.

Unidentified Analyst

And what is the ROE on the Transmission business in the '11 guidance?

David McHale

That continues to be in our sort of blended 12%-ish area.

Jeffrey Kotkin

Our next question is from Paul Patterson from Glenrock.

Paul Patterson - Glenrock Associates

I heard you guys talk about the Mass DPU and the potential I guess for the efforts by some to get a different standard, I think it's around renewables. Could you elaborate a little more on what's exactly driving that? And also if it is adopted, what does that do to the scheduled or do you know what it does to the schedule?

Charles Shivery

Paul, this is Chuck. I guess what's driving it is there was a speech given at the end of the year by an outgoing commissioner that suggested that instead of the "no net harm" schedule, they should have a schedule that says not only is "no net harm", but is there a benefit to the state or to the region or to the customers? There have been a number of folks that have suggested that that might be the appropriate schedule or the appropriate process, even though for about the last 60 years they've used the "no net harm" schedule. The commission, as you know, the Mass DPU, made the decision to suspend their procedural schedule while they evaluated this standard of whether they should do "no net harm". It's a little premature to begin to speculate on what that might do the schedule. A lot of it depends on how long it would take them to come up with the decision on what is the appropriate standard and then continue I think to move forward on whatever procedural schedule they would like to implement. I should mention though that discovery continues even now, so that process is moving along.

Paul Patterson - Glenrock Associates

Even if they were to go to a benefit, a net benefit I guess, approach, haven't you guys mentioned that there are benefits to customers from the combination of the two companies over time and what have you in terms of combining the two companies? Would it be that much different in impact on your ability to show that the merger would be beneficial?

Charles Shivery

We certainly have indicated that there will be, we believe, significant benefits to the customers of all the jurisdictions, as well as significant benefits to the region. It's just the different standard, and it would require a different approach during the evaluation process.

Paul Patterson - Glenrock Associates

Is there a renewable? I thought there was some effort to make sure there some renewable benefit, as well?

Charles Shivery

Paul, when I said that the standard should include something that's beneficial to the state, one of the suggestions that was made was that should include the public policy decisions made by the state around renewable energy.

Paul Patterson - Glenrock Associates

And then the tax rate for 2011, I think you said it was 35% on your guidance, is that correct?

Charles Shivery

Yes , Paul.

Paul Patterson - Glenrock Associates

Do you see that substantially changing in Q3 in 2012? Is there anything driving that number that would go away or something that we should think about?

Charles Shivery

I'll refrain from too much forward-looking specificity, but I think that may be a number that is kind of reflective for an '11 and '12 model. Beyond that, I can't give a whole lot of visibility, but that's probably good for the next year or two.

Jeffrey Kotkin

Next question is from Chris Bassett of Decade.

Unidentified Analyst

Actually, Reza Hetafi from Decade. I guess I thought when the merger was announced, one of the reasons that was mentioned was this would eliminate the need for equity issuances, going forward. But then earlier, I think you mentioned bonus DNA and debt issuances will alleviate equity issuances. I'm kind of confused on if anything changed there or...

Charles Shivery

Well, on your first point, we absolutely said that one of the benefits of this merger is the use of NSTAR cash flow, and that NSTAR cash flow would mitigate the need for what he had previously said was a $300-ish million need in 2012. That was well-understood by all parties, and clearly, one of the broader benefits of the transaction. What I said a few moments ago in the script is that partially offsetting the fact that because the bonus depreciation and rate base declining, it would mitigate some of the cash flow raise or some of the external raise. And for a company like NU, that has been and will be perpetually cash flow negative. I think it sort of exaggerates the point that there are benefits for not raising capital as the NU parent level in particular, both for debt and equity. I stopped short of suggesting that that would completely eliminate a 2012 equity offering. It could have a bearing on it. It could push it out a little bit later in life. And those are things that we continue to analyze, but there's no question that being able to retain some of that internally generated cash flow is going to reduce our cost of capital in the coming years.

Unidentified Analyst

Your CAGR, I guess, I think you reiterated at 6% to 9%. Should we still be using 2009 as the base and where in the CAGR should we -- is it towards the bottom, towards the top, the middle? How should we think about that?

Charles Shivery

It's absolutely off of 2009. And you should not expect us to update that on a standalone basis. I think once this company combines, we'll take a refresh and probably it will be appropriate to kind of move that base. You shouldn't expect us to be moving that 2009 base in front of that. In the most recent disclosures we've made around where in the range, we said, again, one of the benefits of this transaction of the combined company is that it will push us towards the high end of that 6% to 9%. And again, no change there. Very, very strong convictions around being able to achieve that level.

Jeffrey Kotkin

Next question is from Chris Ellinghaus from Wellington.

Christopher Ellinghaus - Wall Street Access

David, could you just refresh our memory. I don't recall from the WMECO case what the DPU did to cause that charge. Was that an after-tax number for the fourth quarter?

David McHale

Yes, that was an after-tax charge. And they were really tow things. One, we had increase in our reserve on collectible expense, and then there were about $600,000 of actually pretax disallowances associated with transaction costs. Costs that -- it almost seems a little kind of funny to us, but costs that doesn't necessarily come with an invoice or costs that weren't competitively bid out that were costs directly associated with putting on the case. So those costs were charged off in 2010.

Christopher Ellinghaus - Wall Street Access

It seems, just looking at the Transmission earnings, that there's a pretty sizable below-the-line component to those earnings. Can you give us any color on what's in there, and what's driving it, and should we expect for 2011 that that number would look similar?

David McHale

Well, consistent with what we said in the past is there are a number of below-the-line items outside of the tariff, but not all that substantial, except for some tax benefits that we received. So we said that kind of year in and year out. We said that those tax benefits are related to credits that we received in Connecticut. And we said that those credits are more significant in years in which we're spending a lot of capital in the state of Connecticut because it's the Connecticut CapEx type of credit. We stopped short of trying to quantify exactly what that is, but for example, in '11, where we're spending -- we're really ramping up on the Greater Springfield Project, even though there's spend in Massachusetts, were spending capital in Connecticut, next year we'll spend a good deal of capital in Connecticut. So you should expect that that will continue to be those below-the-line benefits. We haven't really gone through a great deal of specificity, Chris, on what that is.

Jeffrey Kotkin

We want to thank you for joining us this afternoon. And if you have any further questions, please just give us a call or send us an e-mail. Thanks a lot.

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