Welcome to the Northeast Utilities Earnings Call. My name is Vanessa, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to Jeffrey Kotkin. Mr. Kotkin, you may begin.

Thank you, Vanessa. Good morning, 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 Jim Muntz, President of NU Transmission; Jay Buth, our Controller; Phil Lembo, our Treasurer; and John Moreira, Director of Corporate Financial Forecasting and Investor Relations. 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 forecasts 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, and we also filed it as an 8-K. 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, and our 10-Q for the quarter ending September 30, 2012. 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 and 10-Q. Now I'll turn over the call to Tom.

Thanks, Jeff, and thanks, everyone, for joining us this morning. I understand it's a busy morning with lots of other calls that you're trying to get to. Lee and Jim, as Jeff said, will take you through a more detailed discussion of 2012. Lee, the operations; Jim, the financial performance. We think we had a pretty good year, and I hope at the end of the call that you agree with us. As a prelude to their review, I'd like to give you an overview of the -- I guess, it's the first 10 months and 10 days of this combination that we've created, and like to give you -- share with you some of my thoughts and feelings about it. First of all, how things have gone and most importantly, why I'm so optimistic about our future. On April 10, we began a process of what I call creating a one-company model focused on great, consistent customer service across all of our 6 utility franchises. We organized around this model. We selected a management team into that organization. We pulled them together. I think I told some of you at our Analyst Day, that I took them to a beautiful retreat location, a Hilton hotel in Springfield, Mass, and focused them on the job ahead, which is to create a company that we're all going to be very proud of. I think the word "best practices" is a bit of cliché -- a bit of a cliché, but as you know, we all tend to use it. But what we're really trying to focus the team on and challenge the team is to be transformative. We do not need incremental change, we need transformation to reach the level of greatness, both financially and operationally, that we strive to. And…

Thank you, Tom. 2012 was a good year operationally for the new Northeast Utilities. Reliability and safety performance improved over 2011. We made significant progress in our major transmission projects, and we had a record number of customer conversions to natural gas. We were hit by the third devastating storm in 14 months when Hurricane Sandy bore down on us. And as Tom said, both our preparations and our performance were strong, showing that we continue to implement many of the emergency preparedness enhancements following the storms of 2011. We've also moved to continue to consolidate management around our major business lines: Electric distribution, electric transmission and our natural gas delivery business, so that we can better identify and implement the best practices across our 6 utilities. Just last month, Werner Schweiger, the President of NSTAR Electric, was promoted to the role of President of our electric distribution business. Werner's clear mandate is to move all of our NU Electric businesses to higher levels of performance and customer service. We're also consolidating NSTAR Transmission operations under Jim Muntz, President of the NU Transmission business. Finally, you may recall that the leadership of our natural gas distribution businesses was consolidated at the time of the merger under Rod Powell, who has been the Yankee Gas President for a number of years. Rod's organization has been structured to take advantage of this very unique opportunity. Continued low natural gas prices, driven in part by the rapid increase in the production of shale gas, are causing an unprecedented shift from heating oil to natural gas in New England. In 2012, NSTAR Gas and Yankee Gas together added nearly 8,900 new heating customers, compared with about 6,600 in 2011 and 5,600 in 2010. About 900 of those new customers were municipal, commercial or industrial,…

Thank you, Lee, and thank you all for joining us this morning. We were pleased with our financial performance for the fourth quarter and for the entire year. The $2.28 per share we earned in 2012, exclusive of merger charges, was well within the $2.25 to $2.30 range that we provided during our Analyst Day in early October. Consistent with our prior guidance, $2.28 will serve as the base for our long-term annual EPS growth target of 6% to 9%. This morning, I'd like to cover 4 primary areas. First, our earnings performance for the fourth quarter and full year 2012. EPS comparisons here are a challenge because of the stub year. Legacy NU results are reflected for the full year, but NSTAR's results are only for 9 months. Additionally, we had the exchange of NSTAR shares for 136 million additional NU shares. Second, I'll cover our expectations for 2013 and the primary drivers for the year, as well as some discussion of economic conditions in our region. Third, an update on some current regulatory issues, and finally, a summary of system-wide financing activity, as we continue to take advantage of the current low interest rate environment. Let me start with the discussion of our fourth quarter results. Yesterday, we reported recurring earnings of $0.56 per share, which was just about what we had projected given the quarterly profile of NSTAR's earnings. Aside from the merger impact, there were a number of drivers in the quarter. First, the negative ones. Earnings per share related to our legacy NU Transmission operations declined $0.10 in the fourth quarter of 2012 compared to the same period in 2011, primarily as a result of a higher effective tax rate on our transmission earnings in 2012. Again, this higher tax rate was anticipated because 2011's…

And I'm going to turn back the call to Vanessa just to remind you how to enter questions. Vanessa?

[Operator Instructions]

Thank you very much. First question this morning is from Travis Miller from Morningstar.

I wonder if you could update us on the merger cost savings and how much you did achieve in 2012 and maybe apart from that O&M decrease that you guys have projected, anything you see coming in 2013 that might contribute or even add to those cost savings, that $140 million number?

Well, the merger savings that we experienced in 2012 were around staff reductions in non-operational areas. In benefits, we changed our medical plan for a number of employees. We reduced contractors, insurance, advertising, basically the items that we identified in our net benefit analysis. And we will get the benefit in 2013 of the annualized impact of those savings from last year. Plus, we're focused on additional cost cutting. And in terms of overall magnitude, I think that in the original net benefit analysis, we were targeting staff savings associated with the merger of about 350 people. We did exit about 170 million in 2012, so there's more integration that can happen, more savings that can occur going forward. I think the best guidance I can give you is that we've given the direction that we expect to lower our O&M costs by 3% a year over each of the next 3 years, including 2013.

170 million.

Okay. I think I said 170 million. I think I meant 170 people, individuals.

All right. Our next question is from Kit Konolige of BGC.

I know it's obviously very early still with the Governor's energy plan, but in thinking about what you might file, can you give us some idea if you're thinking in terms of some kind of proposals for innovative or formula rate plans for new rate base and if you can have any sense of what the rate base opportunity might be for expanding gas mains that you might see out there?

Certainly, Kit. This is Jim. The energy plan is consistent with sort of earlier versions in that regard, and what we would expect to file for would be a capital tracker. We've identified the potential in Connecticut, given the low gas penetration that exists there, and it's not unreasonable to expect that it couldn't translate to an additional $100 million a year for gas conversions to try to achieve the goals that the governor's laid out.

All right. The next question is from Paul Patterson from Glenrock.

Just on a couple of things. On Northern Pass, you guys mentioned that, I think, in the next several weeks, we're going to get a route. You guys are going to be filing a route. Should we interpret that to mean that you guys have the -- all the required rights of way to have that route effectuated?

Paul, this is Lee Olivier. Yes. We are very confident that we have a route that is -- we can get sited. As you know, we have spent really the last 2 years acquiring rights of way from private property landowners. We have a number of options around intersections, over public right of ways, so we are very confident we have a route. And again, we'll be looking to announcing that over the next couple of weeks. We'll share that with you.

Okay. And I guess, as you guys are very aware of, there's this group up there that's sort of suggesting that they're getting this land to block you guys and stuff. How should we think about these sort of continual reports that they or claims that they make about that?

We read all of the press as well, and the land in which they have for the most part acquired, is land in which we never have sought to purchase to begin with. So we -- we're not at all concerned with what their claims are.

Okay, great. And then on energy efficiency, you guys mentioned the state policies that are being involved and encouraging and what have you. Obviously, we've seen some negative sales growth for some time, weather adjusted. When we think about your long-term sales growth and we think about what you guys are doing in terms of the regulatory initiatives and just what you already have in place, how should we think about your sales growth, your earnings guidance, long-term earnings guidance, and its dependency or lack thereof on electric sales growth? Do you follow what -- does that -- do you follow me?

Yes, I do, Paul. We've given guidance that we expect sales growth over the next 3 years on the electric side to be between 0.5% and 1%. That's electric sales growth. That's after energy efficiency investments. As you know, in Massachusetts, to the extent the energy efficiency spending ramps up and has an impact, we get recovery of those lost base revenues. We're hopeful that the same model or a similar model could evolve in Connecticut. So again, the 0.5% to 1% is the guidance that we've given for sales growth. But even if energy efficiency ramps up more significantly than we've modeled it, we expect to get recovery through that vehicle of lost base revenues.

Okay. So if there's less sales growth, like we've been witnessing for whatever reason in the last few years, last several years, do you guys still think you guys should be able to achieve within that range of long-term growth that you guys gave us?

We do.

Our next question is from Ashar Khan from Visium.

Lee, can I just -- from your comments that you mentioned that the Northern Pass line ending could be between end of 2016 or the middle of 2017. So should we be -- I was going back to the numbers you gave us at the Analyst Day that showed no Northern Pass CapEx in 2017. Should we be pushing some of the CapEx from '16 to '17 as we stand over here right now based on your comments this morning?

This is Lee Olivier, Ashar. Yes, that is true. In the -- when we publish the 10-K, we'll -- you'll see the cash flows that will move into 2017. And I would have you -- I would just remind you that on these kinds of transmission lines, where you have these large converter stations, the way the payment process works on the converter station is that there is kind of a down payment, some minor payments, and then out at the other end, there's a big payment. So 2000 -- late 2016, early 2017, when we put the converter in, it goes through its acceptance process and operational testing. We make a big lump-sum payment to whoever will be the equipment, the OEM in that particularly case. So yes, you will see that in the 10-K.

Okay. So what you're saying is it's like when you -- the line comes onto line, a huge payment goes out at that time, so that hence, CapEx would move from '16 to '17, some of that?

Yes, exactly. There'll be -- that as well, obviously, depending on the siting process, the length of the siting process, no matter how you look at it now, there would be a payment in '17, even if we finished at the end of 2016. To the extent that we finish further into '17, that payment would just be larger.

Next question is from Michael Lapides from Goldman Sachs.

Just, Lee, real quick question. You rattled through some of the transmission CapEx in 2012 and expectations for 2013. Can you just refresh us on the end of 2012 transmission rate base? And at transmission, but really across all of your businesses, how does 2013 CapEx look relative to what you talked about at the October Analyst Day?

Well, in terms of 2012 in transmission, we essentially had approximately $700 million of transmission CapEx. $192 million of that was from NSTAR. We put in service, in 2012, $636 million, and that includes about almost $300 million of GSRP. So that's what '12 looks like. And if you look at '13 for CapEx, '13, we've got about $636 million, so it's going to be the work on the NEEWS, Northern Pass, about $52 million for Lower Seymour, nearly $20 million for our Boston Network project, our Greater Boston project, that's another set of projects will be $6 million to $10 million. And then there's about 257 of -- excuse me, $369 million on other transmission projects that get you up to that $636 million for next year. In terms of -- as I've said, for Yankee Gas, it's about $170 million for 2013. And in terms of the distribution business, Jimmy, I think it's $660 million?

Yes, roughly, we in total, we spent $1.6 billion of CapEx in '12, and the number in '13 is similar, slightly lower because the transmission is going down by about $50 million or $60 million. But to your question about rate base, we finished 2012 with a transmission rate base of $4.2 billion.

Got it. And I'm just trying to bridge the comments or the analytics from the October Analyst Day to what you're saying now on this call. Just trying to think about CapEx going forward, differences from the Analyst Day versus today, outside of Northern Pass.

I think, essentially, the slight increase in transmission that Lee talked about going from $3.7 billion to $3.9 billion is the only noticeable change from what we reviewed at the Analyst Day.

Yes, if you take $100 million for Northern Pass and then there is kind of a whole array of smaller projects that have better definition around the scope and so forth, so that adds in another $100 million.

Thank you, Michael. Next question is from Caroline Bone of Deutsche Bank.

Sorry, Jim, I missed this on the call. Can you repeat what sort of cash flow benefits and rate base impacts we should expect from bonus depreciation this year?

Yes, the issue is that we have net operating loss carryforwards as a result of the, primarily, the storm expenses that we've incurred, so you wouldn't expect the full benefit of the bonus depreciation to impact us in '13. It may be pushed out into '14 or '15.

Okay, got it. And then also, at the time of issuing guidance in October for 2013, had you accounted for a lower discount rate in the resulting impacts on pension expense?

Yes, we did.

All right. Thank you, Caroline. Next question is from Andrew Weisel from Macquarie.

Just following on Caroline's question about bonus depreciation. I didn't hear -- Can you quantify the amount that you expect over the next several years of cash and the rate base impact relative to what you had given us at EEI?

Yes, the cash flow impact is north of $200 million...

Minimum impact.

And the -- again, the -- because of the net operating loss carryforward, our rate base would not be significantly impacted in '13, but '14 and beyond.

But the $200 million was the cash number not the rate base impact number, right?

That's correct.

Okay. And then I assume still no change to the comment of no equity needs through the forecast period. Any thoughts on longer term?

No, that's still the guidance that we've given, and we've -- we're staying with the 3-year guidance at this point.

Okay, great. And then just lastly, one more on Northern Pass. The transmission services agreement you have with Hydro-Québec, I believe, expires on February 14 of next year. My understanding is that kind of assumes that you'll have all the necessary approvals by the time -- before that deadline. In the event that you don't get all of the approvals by then, can you walk us through the process in terms of would you have to renegotiate with HQ, would this potentially be impacted by the FERC ROE review, and how should we think about the potential for small or not small changes to that, to the economics of the project?

In terms of the TSA issue and expiration on February 14, we've discussed that with HQ. We both agree that we would go forward and do a letter extension around that, and then later on, at some point once we get farther down the road, there's a number of kind of admin kind of issues and so forth we would clean up with -- inside of the TSA, and we would just file a petition at FERC to do that at some point in time, but that's not on the immediate horizon.

Okay. So in other words, even if the approvals do linger on beyond that TSA expiration, your assumption is that it would be just extended and/or amended such that the long-term economics are the same in terms of like ROE agreement off of the slightly higher CapEx base?

Well, we would not change any of the basic kind of aspects of the TSA. It would really be the issue of extending it beyond February of 2014. In other words, we would not propose to change anything around the ROE or any of the other covenants of the TSA.

We have one more question from Michael Lapides. Michael?

Just want to make sure I understand what's happening on GAAP versus cash taxes. Are you expecting to be much of a federal cash tax payer in 2013 or beyond? And if so, kind of how significant of an impact is it from a cash flow statement item?

Yes, we don't expect to be a cash payer in '13.

And longer term, meaning in the 3-year horizon of your EPS guidance?

Michael, this is Jay Buth. We're not going to be a taxpayer in '13. Because of this, we probably will not be a taxpayer in '14 as well.

Thank you, Michael. No more questions, so we just want to thank you all for joining us today. If you have anything -- any follow-ups, just give John or me a call later today. Take care. Thanks a lot.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.