ES

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2007, for Northeast Utilities (NU) and its wholly-owned regulated subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), Western Massachusetts Electric Company (WMECO), and Yankee Gas Services Company. NU operates primarily as a public utility holding company focused on energy delivery through regulated electric distribution, electric transmission, and natural gas distribution segments. The regulated companies represented approximately 92.8% of total earnings in 2007. NU is in the process of exiting its competitive energy businesses, with only a few remaining wholesale marketing contracts and energy services operations under NU Enterprises.

Key Financial Metrics

Consolidated financial statements for the parent company and subsidiaries are incorporated by reference; however, the following specific metrics are disclosed in the filing text:

• Dividends: NU paid total common share dividends of $121 million in 2007, compared to $112.7 million in 2006.
• Debt: Total debt (including short-term debt, capitalized leases, and prior spent nuclear fuel liabilities, excluding rate reduction bonds) was approximately $3.7 billion as of December 31, 2007.
• Capital Expenditures: Consolidated capital expenditures in 2007 totaled approximately $1.3 billion. The 2008 estimate is also approximately $1.3 billion.
• Yankee Gas Earnings: Yankee Gas earned $22.6 million on total gas operating revenues of approximately $514 million for 2007.
• Transmission Rate Base: Estimated at approximately $1.5 billion at year-end 2007, with a forecast to grow to approximately $3.9 billion by the end of 2012.
• Environmental Reserves: Recorded liability for environmental remediation costs was approximately $25.8 million (representing 53 liabilities), with $23.6 million allocated to former Manufactured Gas Plant (MGP) sites.

Material Changes and Operational Highlights

• Electric Sales: Total electric kilowatt-hour sales increased 1.5% in 2007 compared to 2006. Weather-normalized sales increased 0.4%. Growth was driven primarily by an increase in the number of customers rather than usage per customer, as conservation efforts continued due to higher energy prices.
• Rate Cases:
  • CL&P: The Connecticut DPUC approved annualized distribution rate increases of $77.8 million for 2008 and $20.1 million for 2009, with a regulatory Return on Equity (ROE) of 9.4%. The decision did not approve revenue decoupling via a "revenue per customer" mechanism but authorized compliance via rate design with greater fixed recovery.
  • PSNH: The New Hampshire PUC approved an increase in the Default Energy Service (ES) rate to $0.0882 per kWh effective January 1, 2008, reflecting an authorized generation ROE of 9.81%. A distribution and transmission rate settlement provided for a $37.7 million annualized increase effective July 1, 2007.
  • WMECO: Implemented a $1 million rate increase on January 1, 2007, with an additional $3 million increase effective January 1, 2008.
  • Yankee Gas: A settlement approved a 4.2% annualized base rate increase effective July 1, 2007, recovering costs for a new LNG facility and authorizing an ROE of 10.1%.
• Transmission Projects: Significant progress was made on three major southwest Connecticut transmission projects:
  • Middletown to Norwalk: 70% complete as of February 2008; estimated cost $1.05 billion.
  • Glenbrook Cables: 73% complete; estimated cost $223 million.
  • Connecticut-Long Island Cable: 71% complete; estimated cost $72 million.
• FERC ROE Decision: Following a FERC decision on transmission ROE, NU refunded approximately $23.9 million to customers in the first half of 2007. A $1.7 million positive pre-tax difference between the estimated liability and actual refund was recognized in 2007 earnings.

Guidance, Outlook, and Risks

• Capital Program: NU plans to invest approximately $3 billion in regulated electric transmission infrastructure from 2008 through 2012. Approximately 90% of this is expected to earn a ROE of 12.4% due to FERC incentives for new regional transmission investment.
• Regulatory Risks:
  • Revenue Decoupling: Connecticut, New Hampshire, and Massachusetts are investigating revenue decoupling mechanisms to align utility interests with conservation. The impact on future revenues is uncertain.
  • Environmental Compliance: New regulations regarding CO2 emissions (RGGI) and mercury emissions (requiring a scrubber at PSNH's Merrimack Station by 2013) will increase costs. PSNH anticipates the scrubber project will cost $250 million, though this could increase materially.
  • Transmission Siting: Delays in obtaining approvals for new transmission projects could result in increased costs and reduced earnings.
• Legal Proceedings:
  • Con Edison Litigation: Ongoing litigation regarding a failed 1999 merger. NU seeks recovery of merger premium; Con Edison seeks synergy damages. Trial was ordered to be ready in March 2008.
  • NRG Bankruptcy: Settlements were reached in February 2008 regarding station service and congestion charge disputes, with no expected material adverse effect.
  • DOE Litigation: Yankee Companies are suing the U.S. Department of Energy for breach of contract regarding spent nuclear fuel removal. A 2006 court ruling awarded damages, but the DOE has appealed.
• Market Risk: NU Enterprises' remaining competitive businesses (Select Energy) face commodity price risks. A 10% increase in energy prices would result in a $6.8 million pre-tax decrease in fair value for the wholesale portfolio.

Investor Verification Checklist

• Regulatory Outcomes: Verify the final impact of the CL&P rate case decision on 2008 earnings, specifically the 9.4% ROE and the shift to fixed revenue recovery.
• Transmission Project Costs: Monitor the $3 billion transmission capital program (2008-2012) for cost overruns or delays, particularly the Middletown to Norwalk project ($1.05 billion).
• Environmental Liabilities: Track the status of the $25.8 million environmental reserve, specifically the potential for increased costs at the Holyoke Water Power Company site and the $250 million PSNH scrubber project.
• Legal Settlements: Confirm the final resolution and financial impact of the Con Edison merger litigation and the DOE nuclear waste litigation.
• Debt Covenants: Verify continued compliance with the 65% debt-to-total-capitalization ratio required by credit facilities.
• Competitive Exit: Confirm the complete wind-down of NU Enterprises' competitive businesses and the associated mark-to-market impacts on earnings.