Eversource 2008 Annual Report Download - page 18

Management’s Discussion and Analysis
The following discussion and analysis should be read in
conjunction with our consolidated financial statements and
related notes included in this annual report. References
in this annual report to “NU,” “we,” “us” and “our” refer to
Northeast Utilities and its consolidated subsidiaries. All
per share amounts are reported on a fully diluted basis.
The only common equity securities that are publicly traded
are common shares of NU. The earnings per share (EPS)
of each segment discussed below does not represent a
direct legal interest in the assets and liabilities allocated
to such segment but rather represents a direct interest
in our assets and liabilities as a whole. EPS by segment
is a measure not recognized under accounting principles
generally accepted in the United States of America
(GAAP) that is calculated by dividing the net income
or loss of each segment by the average fully diluted NU
common shares outstanding for the period. We use
this measure to provide segmented earnings results and
guidance and believe that this measurement is useful to
investors to evaluate the actual financial performance and
contribution of our business segments. This non-GAAP
measure should not be considered as an alternative to our
consolidated fully diluted EPS determined in accordance
with GAAP as an indicator of operating performance.
The discussion below also includes non-GAAP measures
referencing our 2008 earnings and EPS excluding a
significant charge resulting from the settlement of
litigation with Consolidated Edison, Inc. (Con Edison),
and our 2006 earnings and EPS excluding two significant,
discrete impacts, which are the gain from the sale of our
competitive generation business and a reduction in income
tax expense at The Connecticut Light and Power Company
(CL&P) pursuant to a Private Letter Ruling (PLR) issued by
the Internal Revenue Service (IRS). We use these non-
GAAP measures to more fully explain and compare the
2008, 2007 and 2006 results without including the impact
of these items. Due to the nature and significance of
these amounts, management believes that this non-GAAP
presentation is more representative of our performance
and provides additional and useful information to investors
in analyzing historical and future performance. These
measures should not be considered as alternatives to
reported net income or EPS determined in accordance
with GAAP as indicators of operating performance.
Reconciliations of the above non-GAAP measures to the
most directly comparable GAAP measures of consolidated
fully diluted EPS and net income are included under
“Financial Condition and Business Analysis-Overview-
Consolidated” and “Financial Condition and Business
Analysis-Future Outlook” in this Management’s Discussion
and Analysis.
Financial Condition and Business Analysis
Current Economic Conditions: As widely reported, the
capital and credit markets are experiencing uncertainty
and volatility to an unprecedented extent. This disruption
has weakened and may continue to weaken economic
conditions in parallel with the general decline in consumer
confidence in the Northeast and throughout the United
States. So far, the limited access to capital and higher
cost of capital for businesses and consumers has reduced
spending, resulted in job losses, and pressured economic
growth for the foreseeable future. These weak economic
conditions have aected and could continue to aect our
revenues and future earnings growth and could result in
greater risk of default by our counterparties, including
customers, weaker sales growth, increased energy
conservation, and higher bad debt expense, among other
things. The weak economic conditions are also expected
to put pressure on our ability to obtain distribution rate
relief or to receive approvals on major transmission
projects that will ultimately increase customer rates. We
have included our best estimate of the impacts of these
factors in the assumptions that were used to develop our
earnings guidance; however, we are unable to predict
the ultimate impact of these conditions on our results of
operations, financial position, or liquidity.
In addition, we expect to make significant levels of
investments in our capital projects in 2009 through
2013. The disruption in the capital markets has limited
some companies’ ability to access the capital and credit
markets to support their operations and refinance debt
and has led to higher financing costs compared to recent
years. We use short-term debt and the long-term capital
markets as a significant source of liquidity and funding
for our capital requirements, including construction costs.
We believe our current credit ratings will allow us to have
access to the capital markets as needed (as evidenced
by CL&P’s issuance of $250 million of 10-year bonds in
February 2009 at 5.5 percent). However, events beyond
our control, such as the disruption in global capital and
credit markets that occurred in September 2008, may
create further uncertainty that could increase our cost of
capital or impair our ability to access the capital markets.
In addition, certain of NU’s subsidiaries rely, in part, on NU
parent for access to capital. Circumstances that limit NU
parent’s access to capital could impair its ability to provide
those companies with needed capital. At this point in
time, while the impact of continued market volatility
and the extent and impacts of the ongoing economic
downturn cannot be predicted, we currently believe that
we have sucient operating flexibility and access to
funding sources to maintain adequate liquidity.
Executive Summary
The following items in this executive summary are
explained in more detail in this annual report:
Results, Strategy and Outlook:
• We earned $260.8 million, or $1.67 per share, in 2008,
compared with $246.5 million, or $1.59 per share, in
2007. Results for 2008 included an after-tax charge
of $29.8 million, or $0.19 per share, resulting from the
settlement of litigation with Con Edison. Excluding that
charge, our earnings in 2008 were $290.6 million, or
$1.86 per share.
• After payment of CL&P preferred dividends, our
regulated companies, which consist of CL&P, Public
Service Company of New Hampshire (PSNH), Western
Massachusetts Electric Company (WMECO), and
Yankee Gas Services Company (Yankee Gas), earned
$289.1 million, or $1.85 per share, in 2008, compared
with $228.7 million, or $1.47 per share, in 2007. The
2008 results included earnings of $150.8 million in the
distribution segment (which includes the generation
segment of PSNH and gas distribution segment of
Yankee Gas), and $138.3 million in the transmission
segment. In 2007, our distribution segment earned
$146.2 million and our transmission segment earned
$82.5 million.
• Our competitive businesses, or NU Enterprises, Inc.
(NU Enterprises), earned $13.1 million, or $0.08 per
share, in 2008, compared with $11.7 million, or $0.08
per share, in 2007.
• NU parent and other companies recorded net expenses
of $41.4 million, or $0.26 per share, in 2008, compared
with net income of $6.1 million, or $0.04 per share,
in 2007. Excluding the litigation settlement charge
related to Con Edison, NU parent and other companies
recorded net expenses of $11.6 million, or $0.07 per
share, in 2008.
• In 2008, CL&P completed the final three of its four
major transmission projects in southwest Connecticut.
The projects were completed approximately $80
million below their $1.68 billion budget and the final
project was completed approximately one year ahead
of schedule. Also, in October 2008, CL&P and WMECO
filed siting applications to build their portions of the
$714 million Greater Springfield Reliability Project,
which is the largest project within the New England
East-West Solutions (NEEWS) series of projects. Refer
to “Business Developments and Capital Expenditures
- Regulated Companies - Transmission Segment” in
this Management’s Discussion and Analysis for further
discussion.
• We project consolidated 2009 earnings of between
$1.80 per share and $2.00 per share, including earnings
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