ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2008, for EverSource Energy (filing as Northeast Utilities and subsidiaries). The registrant includes Northeast Utilities (NU), The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The company operates primarily as a regulated utility providing electric and gas distribution, transmission, and generation services in Connecticut, New Hampshire, and Massachusetts, alongside a winding-down competitive wholesale energy business (NU Enterprises).

Key Financial Metrics (Nine Months Ended Sept 30, 2008)

Material Changes vs. Prior Period

• Earnings Growth: Net income increased 9% year-over-year, driven primarily by growth in the transmission segment and a lower effective tax rate. This growth occurred despite a significant $29.8 million after-tax charge related to the settlement of litigation with Consolidated Edison (Con Edison). Excluding this charge, earnings would have been $218.7 million ($1.40 per share).
• Revenue Decline: Consolidated operating revenues decreased 4% ($194 million) due to a $124 million reduction in competitive business revenues (as NU Enterprises winds down) and lower regulated distribution revenues caused by reduced load and customer migration to third-party suppliers.
• Transmission Segment: Transmission earnings surged, increasing from $57.0 million in the prior year to $103.6 million, reflecting a higher investment base and the impact of a FERC order increasing the allowed Return on Equity (ROE).
• Derivative Liabilities: The adoption of SFAS No. 157 (Fair Value Measurements) resulted in a significant increase in CL&P's derivative liabilities (approximately $590 million) related to Contracts for Differences (CfDs), offset by regulatory assets as these costs are recoverable from customers.
• Capital Spending: Cash capital expenditures increased 27% to $951.8 million, primarily due to major transmission infrastructure projects in southwest Connecticut (Middletown-Norwalk and Glenbrook Cables).

Guidance, Outlook, and Risks

• 2008 Guidance: Management projects full-year 2008 diluted EPS between $1.60 and $1.75 (including the Con Edison charge) and $1.80 to $1.95 (excluding the charge).
• 2009 Guidance: Projected diluted EPS is between $1.80 and $2.00. This assumes continued growth in transmission earnings and rate relief at CL&P and PSNH, offset by economic headwinds on sales and pension expenses.
• Long-Term Growth: The company targets an average compounded annual EPS growth rate of 8% to 11% through 2013, contingent on the successful deployment of a capital program estimated at up to $7 billion from 2009 to 2013.
• Liquidity: Despite volatile financial markets, liquidity is deemed adequate. The company has approximately $285 million in borrowing availability on revolving credit lines and $86 million in externally invested cash (as of Nov 5, 2008). Credit ratings remain stable (BBB to A- range).
• Key Risks:
  • Regulatory: Outcomes of rate cases and FERC rulings on transmission incentives (NEEWS projects) are critical to future earnings.
  • Environmental: Ongoing remediation costs at the Holyoke Water Power (HWP) tar site; current reserve is $2.6 million, but costs could increase.
  • Market: Exposure to commodity price volatility in remaining wholesale contracts and credit risk from counterparties (e.g., Constellation Energy), though most risks are mitigated by regulatory cost recovery or collateral requirements.

Investor Verification Checklist

• Con Edison Settlement Impact: Verify the exact timing and accounting treatment of the $49.5 million payment to Con Edison and its impact on 2008 cash flows versus earnings.
• Transmission Project Status: Confirm the completion dates and cost estimates for the Middletown-Norwalk and Glenbrook Cables projects, as delays could impact rate base recovery and earnings.
• Derivative Valuation: Review the sensitivity of CL&P's CfD liabilities to changes in forward capacity market prices, as these significantly impact the balance sheet (though not earnings due to regulatory accounting).
• Environmental Reserve Adequacy: Monitor updates on the HWP tar site remediation to ensure the $2.6 million reserve remains sufficient against potential cost increases.
• Capital Program Execution: Assess the company's ability to raise the projected $550 million to $650 million in external financing required for mid-2009 capital investments given current market conditions.