ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for Northeast Utilities (NU) and its subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The registrants are regulated utility companies operating in Connecticut, New Hampshire, and Massachusetts. The filing includes unaudited condensed consolidated financial statements and management discussion and analysis.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Growth: Net income attributable to controlling interests increased by $39.3 million (67%) compared to Q1 2008. This increase is primarily driven by the absence of a $29.8 million after-tax litigation settlement charge recorded in Q1 2008, alongside higher earnings from regulated distribution and transmission segments.
• Revenue Increase: Operating revenues rose by $73.5 million (5%), largely due to higher regulated company revenues ($89 million increase) driven by rate increases and regulatory tracking mechanisms, partially offset by lower competitive business revenues.
• Liquidity Improvement: Cash and cash equivalents surged from $89.8 million at year-end 2008 to $416.8 million at March 31, 2009. This was fueled by a $370.8 million common share issuance in March 2009 and a $250 million bond issuance by CL&P in February 2009.
• Capital Expenditures: Cash capital expenditures decreased to $208.9 million in Q1 2009 from $288.1 million in Q1 2008, primarily due to the completion of major transmission projects in southwest Connecticut in late 2008.

Guidance, Outlook, and Risks

• 2009 EPS Guidance: Management projects consolidated 2009 earnings between $1.80 and $2.00 per share, estimating results will be toward the lower end of this range. This guidance incorporates the impact of the March 2009 share issuance.
• Segment Outlook:
  • Regulated Companies: Expected to earn $1.85–$2.00 per share (Distribution: $1.00–$1.10; Transmission: $0.85–$0.90).
  • Competitive Businesses: Expected to earn $0.00–$0.05 per share.
  • NU Parent/Other: Expected to incur expenses of $0.05 per share.
• Capital Program: Projected 2009 cash capital expenditures are approximately $920 million. Major projects include the New England East-West Solutions (NEEWS) transmission projects and PSNH's Merrimack Clean Air Project.
• Key Risks and Contingencies:
  • Pension Funding: Due to market declines in 2008, the pension plan funded ratio dropped to ~77%. While no contribution is required in 2009, the company estimates a potential pre-tax contribution of $150 million to $200 million in 2010.
  • Regulatory Matters: Ongoing reviews include CL&P's CTA/SBC reconciliation, PSNH's ES/SCRC reconciliation, and the Merrimack Clean Air Project cost recovery. Management does not expect material adverse impacts from these reviews.
  • Environmental: Holyoke Water Power Company (HWP) has a reserve of $1.7 million for remediation of a tar site, with a probable cost range of $1.7 million to $2.4 million.
  • Market Conditions: Weak economic conditions in the Northeast may impact customer default rates and sales volumes, particularly in the industrial sector.

Investor Verification Checklist

• Share Issuance Impact: Verify the dilutive effect of the 18.975 million shares issued in March 2009 on future EPS calculations.
• Pension Liability: Monitor the funded status of the pension plan and the timing/amount of the projected 2010 cash contribution ($150M–$200M).
• Regulatory Approvals: Track the status of the NEEWS transmission project siting approvals and the PSNH Merrimack Clean Air Project cost recovery proceedings.
• Derivative Exposure: Review the fair value of NU Enterprises' remaining wholesale derivative contracts (net liability of $49.2 million) and associated counterparty credit risks.
• Storm Cost Recovery: Confirm the regulatory approval for the recovery of major storm costs incurred in December 2008, particularly for PSNH and WMECO.