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.

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.

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…

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…

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…

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?

[Operator Instructions]

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

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?

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.

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

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.

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

Right.

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?

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.

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

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.

Our next question is from Jay Dobson from Wunderlich.

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?

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.

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.

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

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.

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

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.

Our next question is from Ashar Khan from Vizium.

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.

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.

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

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

Our next question is from Paul Patterson from Glenrock.

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?

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.

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?

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.

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

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.

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

Yes , Paul.

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?

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.

Next question is from Chris Bassett of Decade.

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...

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.

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?

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.

Next question is from Chris Ellinghaus from Wellington.

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?

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.

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?

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.