Welcome to the Northeast Utilities First Quarter Earnings Conference Call. My name is Christine, and I'll be your operator for today's conference. [Operator Instructions] Please note, today's conference is being recorded. I will now turn the call over to Jeffrey Kotkin, Vice President, Investor Relations. You may begin.

Do we have technical difficulties, gentlemen? [Technical Difficulty]

Thank you for standing by. Mr. Kotkin, you may begin.

All right. Sorry to keep you waiting here. We were having an audio problem back in Hartford. So let me start, and good afternoon, and thank you for joining us today. I'm Jeff Kotkin, NU's Vice President for Investor Relations. Speaking today will be Tom May, NU's President and Chief Executive Officer; Lee Olivier, NU Executive Vice President and Chief Operating Officer; and Jim Judge, NU Executive Vice President and Chief Financial Officer. Also joining us today are Jay Buth, our Controller; and Phil Lembo, our Treasurer. Before we begin, I'd like to remind you that some 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 risk and uncertainty, which may cause the actual results to differ materially from forecast and projections. Some of these factors are set forth in the news release issued yesterday. If you have not yet 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, 2011. 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-K. Now I will turn over the call to Tom.

Thanks, Jeff, and thanks, everyone, for joining us this afternoon. Here I am, excited to be the new CEO of NU, 3 weeks on the job. And I can tell you, I'm more excited now that I thought I'd be. We really do have a great opportunity here. And hopefully, I can share some thoughts with you on why I am so excited about this. This merger between the 2 largest New England-based utilities ensures that 3.5 million electric and gas customers are going to be served by a company whose only roots are here in New England. And as many of you know, I'm a nut about customer service. It means the policymakers in Boston, Hartford, Concord only have to look in their backyards to find the management of the largest regulated utility. And it means that the 3.5 million customers that we serve won't have to look too far to see a Northeast Utilities employee, since you all live right here in New England. In fact, I've been spending a lot of time going out to the field with town hall meetings talking to my linemen, talking to my troops to make sure they recognize that we are in the customer service business. That's my focus. But I need every one of those 9,000 strong to focus on the customers for us to be successful, and I think we're making some great progress. But this company is much more than a regional energy provider. We're going to have the scale to manage a highly effective and efficient company, and I think you know I am a nut about efficiency also. And as a $11 billion to $12 billion market cap company, we're going to be able to access the capital markets on very attractive terms, better than we…

Thanks, Tom. Allow me to start by reviewing our transmission investment initiatives, beginning with our NEEWS project. With extremely favorable weather that we have had to date, we're about 64% complete with the Greater Springfield Reliability Project. The project will provide an important new 40-mile pathway to move power reliably between Western Massachusetts and Connecticut. We continue to expect the projects to be completed by late 2013 at a cost of $718 million. Of that sum, $426 million was invested as of March 31. Turning to the Interstate Reliability Project. You may recall that we filed our application with the Connecticut Siting Council in December. Last month, we completed 3 days of field reviews and 3 evenings of public hearings in Northeastern Connecticut on the project. ISO New England and we are updating the planning studies to reflect the latest available data and are scheduled to submit testimony in support of the project later this month. Evidentiary hearings are scheduled to begin in June, and we continue to expect a final decision in 2013. While we were building the 40-mile, $218 million Connecticut section of this project, National Grid will build the Rhode Island and Massachusetts sections. After receiving updated planning studies from ISO New England later this month, we expect National Grid to file its siting application later this quarter and to receive final approval in late 2013. We continue to expect the project to enter service in late 2015. The final major element of NEEWS is the Central Connecticut Reliability Project. As we've mentioned earlier, ISO New England will review this project as part of a comprehensive study known as the Greater Hartford Central Connecticut study. We continue to expect ISO to issue a preliminary needs analysis and related transmission solutions next year. Turning to NSTAR Electric. The…

Thank you, Lee. Let me start by saying how pleased I am to speak to you all today as Northeast Utilities' Chief Financial Officer. Before beginning with my formal remarks, I want to reiterate earlier comments about how pleased we all are that we're able to merge these 2 companies into the new NU. We have tremendous opportunities available to enhance the benefits we can bring to our customers and our region while simultaneously creating very attractive value for our investors. There's several areas I want to focus on before we turn to your questions. The first area involves the settlements we reached in Massachusetts and Connecticut that moved us to the regulatory approval. The second will be our financial results for the first quarter, the expected impact of the merger on our second quarter results and the state of our region's economy. The third area involves financings we have accomplished thus far this year and what we project for the balance of the year. And lastly, I want to discuss the work we are now undertaking to create a high-performing, customer-responsive and cost-efficient merged organization. I'll start with the merger settlements that Tom touched on a little earlier. In Massachusetts, we reached 2 comprehensive settlements, one with both the attorney general and the State Department of Energy resources, and the other exclusively with the DOER. The 3-party settlement incorporated several key provisions. First, it freezes base distribution rates through 2015 for NSTAR Electric, NSTAR Gas and Western Mass Electric Company. Second, it provides a $21 million rate credit to customers in the current billing cycle. That's $15 million for NSTAR Electric customers and $3 million each for NSTAR Gas and Western Mass customers. While base delivery rates are frozen, this settlement continues to allow NSTAR Electric's recovery of loss…

And I'll turn the call back to Christine to remind you how to enter questions. Christine?

[Operator Instructions]

Thank you very much, Christine. Our first question this afternoon is from Greg Gordon of ISI. Greg?

And Jim, the question is for you. I know you're attempting via this call to sort of give us verbally a lot of the puts and takes that you're looking at and what's going to be a very sort of unique year because of all the transition costs and the weather and all the other things that are happening. At some point, are you going to be able to, a, give us what you see as sort of a normalized earnings number for this year and, b, confirm that you still believe that this is a company that can grow at the 6% to 9% earnings growth rate that was articulated when the deal was announced off of what would otherwise be a normal base level of earnings?

Yes, Greg. As I indicated, we're not prepared to sort of talk specifically about 2012's guidance or the long-term rate. I think you got a sense from Tom, Lee and my comments that we're bullish on the company. We think we've got great opportunity ahead. When you look at both of these companies, NU and NSTAR and their track record, certainly, over the past 5 or 10 years, the performance has been well above industry average in terms of earnings growth, in terms of total shareholder return. So the new NU offers a very long track record of notable and consistent success for investors. What we'd like to do is make sure that we have the team in place, that we develop a plan, that we have broad consensus upon, we review that plan and get the endorsement of our board. And at that point in time, we will provide guidance to Wall Street of a plan that we're very confident and that we'll be able to achieve. So we will provide guidance, but it's not going to be on this call.

I appreciate that, I appreciate that. But look -- if we look at the starting point, would it be fair to go back to all the structural drivers that have been in the presentations to date and just think about how those things have changed for better for worse, I guess? So the one thing that I know has just come up has been this FERC order -- just came out today. I know it's probably not the best timing given the earnings call, but can you comment on what do you think next steps will be in your relationship with the Massachusetts AG around the FERC's proposal that you enter settlement talks?

Yes, you're right. It just did come out. I think I got to see it about 30 minutes before this call. I haven't had any discussion, obviously, with the advisors, FERC counsel or senior team even. I still feel that our position is sound, and our existing rate is fair and reasonable. And apparently, Commissioner Moeller who dissented actually agreed, so we're not going to speculate on our response. It's too early to predict an outcome. It could be a litigated outcome that would take 15 months or it could be a settlement prior to that. What I would point out is that we have a very good track record in both arenas, litigated cases, as well as rate settlements. So I think I'm confident at the end of the day, we'll have a reasonable outcome.

Next question is from Travis Miller from Morningstar.

Well, a question on Yankee Gas. The CapEx spending that you've laid out in the past, how could that be affected if you sustain this kind of 5% plus type normalize growth and is that baked into the low growth portion that you laid out?

Travis, this is Lee Olivier. The current budget that we have at Yankee, so it really looks at spending about $565 million over the course of the next 5 years. When we put that together last year, we kind of baked in the current growth rates that we have now, which is about a 5% growth in gas sales. So I think we will be well equipped to stay within that. I think we have flexibility in and around other work we can do at Yankee Gas. So I think that currently is a good number. Now should there be legislation that gets passed in Connecticut that spurs, shall we say, conversions as results of subsidies that the state is willing to provide, then that's a different story. Then we'd have to go back and take a look at what that does to our capital program.

Does that 5% get you to the allowed ROE or does that get you well above, meeting your -- earning your allowed ROE based on those projections?

That would get us off the allowed ROE right now.

Above? Sorry, I didn't catch that.

I think there's obviously a number of variables in there. This is Jim. What are the O&M synergies that we're able to achieve? So I think we obviously have sales growth opportunities that should allow us to continue to have a very favorable ROE. If you look at the ROEs that the NU family of companies have produced last year, they were all approaching the allowed ROE numbers. So I think there's reason to believe that we can continue to maintain that kind of performance going forward.

Next question is from Ashar Khan [ph].

Can I just ask just for reference purposes, what is the -- I know I had it for NU, but what is for the combined company as we have now, what is the 100 basis points on transmission variance equals positive or negative delta on earnings? Is there a number that you can share with us with the combined entity and the new share count?

Yes, Ashar. I think we actually disclosed in our 10-Q a rule of thumb there, and I think that a 10 basis point change is worth $2 million of net income.

That's for the combined company?

That's for the combined company.

Okay. And then can you just a little bit tell us where we stand on this transmission line, how the process is going along and when can we hear some more definite information on the routes and everything from you guys?

Ashar, I think you're referring to Northern Pass?

That's correct.

This is Lee. Where we are right now is in procuring the last 40 miles of the right-of-way, and I can tell you we're making very, very strong progress in lining up that right-of-way. I think we're on tap for the middle of the year, approximately in August time frame, to have the right-of-way secured and then to be prepared to file with the DOE the route and then start the environmental sampling process that is required. It's a 2-season process, so it's kind of a spring and fall process -- spring, fall, winter. So we'll be ready to go. And should we stay on that schedule, we would be ready to have the project go in service in late 2016. So we continue to work with HQ around the issues and technical aspects of the project, continue to line up the land. We continue to do outreach in the communities, particularly in Northern New Hampshire. We continue to meet with other key stakeholders in New Hampshire to continue that influencing process around the project.

And if I can just ask one more question. The pension that you mentioned for NU stand-alone, which would be kind of like -- something like $0.10 or something. Does that reverse next year or is it just -- it's going to reset this to a lower base of earnings? I'm a little bit confused.

Yes, it's a $0.10 increase this year that we think goes away next year so that the pension cost estimate for 2013 is going to look more like 2011.

Our next question is from Jay Dobson from Wunderlich.

Jim, I was hoping you could talk about the cost reductions, and I knew you were alluding to that in some of the drivers to earnings. But just how that ought to flow -- obviously, interested in 2012 but maybe even '13, '14, and I know it's early. But how should some of those cost reductions flow, meaning how fast can we achieve them, I guess, is what I'm getting at just for clarity?

Yes, we had in our net benefits analysis that we filed with the regulators, it was essentially a 4-year ramp-up of savings, largely driven by attrition opportunities in terms of staff reductions based upon retirements and not backfilling positions. So it was a slow ramp-up and then continued escalating at a lower rate beyond there. I think we're looking long and hard at that issue. I think we recognize that we've had a very conservative approach to that study, and I think we have an opportunity to actually accelerate some of those savings that we had targeted in that regional plan. So we have in the past done a merger. If you go back 10 years in terms of NSTAR's experience, the Boston Edison Commonwealth merger, we were able to extract costs out of the company. And we did it steadily over a number of years, so that the earnings impact tended to be progressive as we went out in time after the merger. So we hope to have the same opportunity here.

Got you. No, that's great. And I'm not sure who to address this to, so I'll address it to you, Tom, and maybe you could throw it out to whoever you think, and I'm back to the FERC issue. Can you just talk a little bit about how you're seeing FERC right now? Obviously, we're short a commissioner -- how that plays into what they announced today and appreciate -- I'm not sure who made the comment, but that Commissioner Moeller was dissenting on what they released today. But just play into sort of how you're looking at FERC right now?

That's a tough one. We don't -- as you say, it is in flux. They're waiting for a new commissioner. It will result in a full commission, so that you can get a majority instead of a hung jury. But this obviously came out before that. And on the surface, it just simply sets us up for a rate proceeding, if you will, on the issue of what is the right return. And as Jim said, it's new to us. It caught us a little off guard. We weren't expecting it today, and we're still sorting through it. But we, at this stage, aren't reading anything into it other than, as Jim said, we believe we have a strong basis for our position, and we're just going to take the next steps.

Our next question is from Michael Lapides from Goldman Sachs.

A couple of questions. One on rate increases or rate changes, I just want to sanity check some of the things you said regarding New Hampshire and Connecticut. In New Hampshire, can you walk us through both the distribution rate changes expected over the next year or so and how much the Merrimack related one would be?

Yes, I don't have that information readily available, Michael.

Okay. Well, then just real quick on the Merrimack one. Is that rate change dedicated to that project? Is that not something that's already a known amount?

Yes, we get temporary recovery of about 2/3 of our cost of the scrubber, and the PUC out there will have a final order that will determine the prudent cost recovery amount and what will be in rates going forward. So it's a preliminary estimate to be decided with the final order at some point later.

I would just add in too, Michael, that we have over-collections at PSNH as a result of forecasted rates around energy and the actual rates around energy in terms of what our procurement has been significantly under that. So although there'll be an impact, we don't think that would be a huge impact on PSNH customers.

Yes. Michael, I think also Jim mentioned earlier that there was the rate increase that was due to additional construction of distribution facilities. That was dialed into that 5-year rate decision. We estimate right now that's about $6 million, $7 million in the middle of the year. There's also -- there'll be storm true-ups and everything. So we don't have that full number for you right now, but you're looking at change in the middle of '12. And also per what Lee was talking about, once the generator -- once the generation docket is over, once the prudence docket is over, you're probably looking at another reset at the beginning of next year. But that rate not only will it reflect the scrubber, but all the other purchase power that goes into that energy rate for PSNH. So it's sort of tough to answer that question exactly how you produced that.

But if I just do back-of-the-envelope, you said you've got about 2/3 of the cost of the scrubber in rates and recovery right now. So if I just do 1/3 times the cost times your WACC, that directionally gets me there, just kind of thinking 50,000-foot level?

All right. That's fair.

Okay. Second, Connecticut, can you touch a little bit about the infrastructure tracker, how much you'll spend per year when the revenue changed tied to that will go into effect?

You can think of it as $300 million, roughly $50 million a year for 6 years. Our base case right now is to think of it as $50 million for 2013 and 2014, and we'll have to propose it at the PURA for recovery.

We'll have the docket mid-year. We'll have the docket -- we'll propose a infrastructure hardening, as Jimmy said, and the agreement limits that by about $25 million of rate revenue recovery each year.

So you'll see something filed mid-year.

Okay. So if you file it mid-year, it probably goes into effect sometime early in 2013. If you spend $50 million and if I just apply kind of high level of 10% pretax WACC, that's roughly a $5 million a year rate change?

Michael, we can take some of the numbers offline and look at what actually is being passed and filed and what may be filed in New Hampshire.

Sounds great.

Next question is from Paul Patterson from Glenrock Associates.

A lot of my questions were answered but -- and I apologize if I missed this, did the quarter include a leap year through the sales growth, excuse me?

Yes, it did.

Okay. And so we just back out, what, about 1%?

Roughly 91 days, 1 day.

So when we look at this, I know it was just one quarter, but you guys have had some pretty anemic growth really, right? I mean any change in your forecast or any thoughts about that for sales growth?

It's all about the weather. It's all about the weather, Paul. When you look weather-adjusted, the numbers look pretty good, I mean. As I indicated, the temperature in Hartford was 2 full degrees milder than the all-time record that they've had here for that quarter. January, it was 5 degrees milder than normal. February, it was 6 degrees milder than normal. So -- in March, it was 9 degrees milder than normal. So it's tough to sort of draw any conclusions about any anemic sales with that as the catalyst for the numbers.

Well, I mean, when I'm looking at weather-normalized on the -- and maybe I'm looking at the wrong thing, it looks like it it's 0.1% for weather-normalized growth in that [indiscernible] and that includes a leap year, right?

It does, it does.

Next question is from Steve Fleishman from Bank of America.

A couple of questions. First on Northern Pass. The -- I guess, Lee, what's your conviction level on third quarter being kind of the right time to have this new route? Obviously, it's been tough to pin these things down.

Steve, I'm actually very confident third quarter is a good time frame. Obviously, because we're out in the real estate markets procuring land I can't be terribly specific of just how much land we have left, but I can tell you we're closing on that. I think we're very optimistic. So I think as we speak, third quarter is a good time frame. I'm very confident in that.

Okay. And is it possible or likely that the overall size -- the overall cost of the line ends up going up given some of the changes?

Actually, with the work that we had done right now in terms of the studies we have to do for ISO New England, the so-called I-39, the studies we need to do around capacity markets, which is called the overlapping impact study to determine how much capacity HQ would be paid for. I do not see a significant increase in the cost of that line, which is good, because it's obviously very important that HQ is a project which is profitable for them, as well as us. So I'm pretty confident that, that $1.1 billion, give or take, we'll say $100 million is a pretty good number.

Okay. And then one last question, Tom. I think you noted the low dividend payout of the company, and I know you're still working on kind of putting your full plan in place. But do you think over time, given the mix of assets of the company, you'll be targeting kind of a higher overall dividend payout ratio than the old Northeast Utilities has been?

Don't know yet. As Jim said, we are in the throes of a planning process that just yesterday, we promised the board we would bring back to them. It's a new board that is excited about the future but also interested in being part of the decision-making process. So we do intend to vet that with them, and they are excited. As we said, we're happy that even though we bumped NU's dividend by 17% or whatever, we're still in a low range versus companies that tend to be pure delivery companies. So we've got room to move. And it gives us great comfort that we can still be considered a growth company rather than a yield company, and we hope that our yield reflects that.

Next question is from Jonathan Arnold from Deutsche Bank.

My question is, you talked about you're either going to give this outlook at an Analyst Meeting or potentially not until the fall EEI conference. Is it safe to assume that fall EEI is sort of the latest this would come?

I think that's a safe bet.

And how much sooner than that might it come, Jim, in sort of generalities if [indiscernible]

I do think that we -- as I said, we want to be certain and sure of what we're providing for guidance. And we have a process where we just had our first board meeting, as Tom mentioned, yesterday and today. We just named the Vice President level just before the merger closed 3 weeks ago. We're moving forward with the next level of management, the distribution management. We have an off-site for that executive team in about a month. So I can see us doing a lot of work during the summer and coalescing on a plan that we have some consensus on the end of the summer into September potentially. So I consider maybe the options would be a September Analyst Day, where we could provide some insight as to the new company's prospects. Potentially, EEI is not far behind that. So that's sort of the window I'm thinking of right now, Jonathan.

Jonathan, I think you know our track record. And one of the reasons we've been so successful is that I'm a big believer in not top-down planning but really having everybody involved, everybody owning the plan. And so as Jim said, we're putting the team together. We're having our first leadership team meeting where we're going to be talking about the importance of this 3-year plan on whatever it is, May 24 and 25. And we like to drive it down so that people agree on the assumptions, agree on the goals, agree on these strategies and priorities and then they own it. And when they own it, they commit to deliver it. And we haven't missed too many estimates because of the process that we use. So that's why we're -- we don't want you to seem like we're too cautious. We're just in a mode here where we initially thought that we would have our management team all picked and in place and up and running by now. But because we had so much trouble getting this merger through the different gates, we sort of held off so that we wouldn't be in a situation of selecting certain executives, which meant you unselected others. And as a result, if it didn't go through, we would have had some broken China in the process. So we're a little bit behind. You have to be patient with us. But we're confident that now that we get the team in place, we'll create the plan that you'll all be proud of.

Tom, I appreciate the extra color as to how the circumstances are different. That's very helpful. And did I just hear you correctly that you're planning on giving a 3-year outlook?

Well, that's what we're working on internally. As to what we provide long term, we still haven't figured that out. And as Jim said, we've got to vet that through our new board, the new NU board.

You'll do a 3-year plan and how much of it you share of that with us, we'll find out when you share it.

That's correct.

It looks like we have one last question from Ashar Khan [ph] again.

My question has been answered. It was about the payout.

One more, Michael Lapides from Goldman.

Real quickly, what do you view as the biggest hurdles, or the biggest risk in terms of achieving some of the cost savings outlined in the planning document when you first filed the merger and the biggest opportunities to where -- given your history 10 years ago, where you could beat those levels?

I think the biggest challenge is making sure that the cuts are happening in the right places. I mean, we are committed to improvements in reliability, in customer service. So across the board, cost reductions that impact customer-facing operations is unlikely to be the case. So I think the fact of the matter is we have a track record of taking costs out of the business and actually improving reliability and customer service at the same time, but not mutually exclusive. So the challenge is to keep that in focus as you develop your plan.

And we want to thank you all for joining us this afternoon. If you have any follow-up questions, please give us a holler. Have a good afternoon and evening.

Thank you for participating in the Northeast Utilities First Quarter Earnings Conference Call. This concludes the conference for today. You may all disconnect at this time.