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MERGER OF NU AND NSTAR
 6 Months Ended
Jun. 30, 2012
Notes To Consolidated Financial Statements [Abstract]  
Business Combination Disclosure [Text Block]

2.       MERGER OF NU AND NSTAR

 

On April 10, 2012, NU acquired 100 percent of the outstanding common shares of NSTAR. Pursuant to the terms and conditions of the Agreement and Plan of Merger, as amended, the "Merger Agreement," NSTAR merged into NSTAR LLC, becoming a wholly-owned subsidiary of NU.

 

NSTAR LLC is a holding company engaged through its subsidiaries in the energy delivery business serving electric and natural gas distribution customers in Massachusetts. The merger was structured as a merger of equals in a tax-free exchange of shares. As part of the merger, NSTAR shareholders received 1.312 NU common shares for each NSTAR common share owned (the "exchange ratio") as of the acquisition date. The exchange ratio was structured to result in a no-premium merger based on the average closing share price of each company's common shares for the 20 trading days preceding the announcement of the merger in October 2010. NU issued approximately 136 million common shares to the NSTAR shareholders as a result of the merger, which brought the total common shares outstanding to approximately 314 million shares as of April 10, 2012.

 

Purchase Price: Pursuant to the merger, all of the NSTAR common shares were exchanged at the fixed exchange ratio of 1.312 common shares of NU for each NSTAR common share. The total consideration transferred in the merger was based on the closing price of NU common shares on April 9, 2012, the day prior to the date the merger was completed, and was calculated as follows:

NSTAR common shares outstanding as of April 9, 2012 (in thousands)*  103,696
Exchange ratio 1.312
NU common shares issued for NSTAR common shares outstanding (in thousands)  136,049
Closing price of NU common shares on April 9, 2012$36.79
Value of common shares issued (in millions)$ 5,005
Fair value of NU replacement stock-based compensation awards related to pre-merger service (in millions) 33
Total purchase price (in millions)$ 5,038

*       Includes 109 thousand shares related to NSTAR stock-based compensation awards that vested immediately prior to the merger.

 

Certain of NSTAR's stock-based compensation awards, including deferred shares, performance shares and all outstanding stock options, were replaced with NU awards using the exchange ratio upon consummation of the merger. In accordance with accounting guidance for business combinations, the portion of the fair value of these awards attributable to pre-merger service is included in the purchase price as it represents consideration transferred in the merger. See Note 9B, "Employee Benefits – Share-Based Payments," for further information.

 

Purchase Price Allocation: The allocation of the total purchase price to the estimated fair values of the assets acquired and liabilities assumed has been determined based on the accounting guidance for fair value measurements, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The allocation of the total purchase price includes adjustments to record the fair value of NSTAR's unregulated telecommunications business, regulatory assets not earning a return, lease agreements, long-term debt and the preferred stock of NSTAR Electric. The fair values of NSTAR's assets and liabilities were determined based on significant estimates and assumptions, including Level 3 inputs, that are judgmental in nature. These estimates and assumptions include the timing and amounts of projected future cash flows and discount rates reflecting risk inherent in future cash flows. All purchase price adjustments are preliminary and subject to change as additional information is obtained.

 

The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill. The allocation of goodwill to NU's reporting units has not yet been completed. The preliminary allocation of the purchase price is as follows:

(Millions of Dollars)  
Current Assets$ 754
Property Plant and Equipment, Net  5,155
Goodwill  3,231
Other Long-Term Assets, excluding Goodwill  2,115
Current Liabilities  (1,332)
Long-Term Liabilities  (2,723)
Long-Term Debt and Other Long-Term Obligations  (2,123)
Preferred Stock of Subsidiary  (39)
Total Purchase Price$ 5,038

Pro Forma Financial Information: The following unaudited pro forma financial information reflects the pro forma combined results of operations of NU and NSTAR and reflects the amortization of purchase price adjustments assuming the merger had taken place on January 1, 2011. The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that would have been achieved or the future consolidated results of operations of NU. The pro forma financial information does not include potential cost savings or non-recurring costs. This information is preliminary in nature and subject to change.

(Pro forma amounts in millions, except per share amounts)For the Three Months Ended June 30,  For the Six Months Ended June 30,
2012 2011 2012 2011
Operating Revenues$1,629 $1,691 $3,459 $3,754
Net Income Attributable to Controlling Interest 133  142  243  328
Basic EPS 0.42  0.45  0.77  1.05
Diluted EPS 0.42  0.45  0.77  1.04

NU and NSTAR incurred non-recurring transaction costs and costs related to the Connecticut and Massachusetts settlement agreements recorded in the second quarter of 2012 described below, with the following aggregate after-tax impacts not included in the pro forma earnings presented above:

  For the Three Months Ended June 30,  For the Six Months Ended June 30,
(Millions of Dollars)2012 2011 2012 2011
Transaction and Other Costs$29 $2 $31 $16
Settlement Agreement Impacts 60  0  60  0
Total After-Tax Non-Recurring Costs Excluded            
 from Net Income$89 $2 $91 $16

Regulatory Approvals: On February 15, 2012, NU and NSTAR reached comprehensive settlement agreements with the Massachusetts Attorney General and the DOER related to the merger. On April 4, 2012, the DPU approved the settlement agreements and the merger of NU and NSTAR. On March 13, 2012, NU and NSTAR reached a comprehensive settlement agreement with both the Connecticut Attorney General and the Connecticut Office of Consumer Counsel. On April 2, 2012, the PURA approved the settlement agreement and the merger of NU and NSTAR. The settlement agreements included base distribution rate freezes until December 1, 2014 for CL&P and through 2015 for NSTAR Electric, NSTAR Gas and WMECO.

 

See Note 10B,"Commitments and Contingencies – Long-Term Contractual Arrangements,” for further information on commitments required under the settlement agreements.

 

The pre-tax financial impacts of the Connecticut and Massachusetts settlement agreements that were recognized by NU, CL&P, NSTAR Electric, and WMECO in the second quarter of 2012 are summarized as follows:

 For The Three and Six Months Ended June 30, 2012
(Millions of Dollars)NU CL&P NSTAR Electric WMECO
Customer Rate Credits$ 46 $ 25 $15 $3
Storm Costs Deferral Reduction 40  40   -   -
Establishment of Energy Efficiency Fund 15   -   -   -
Total$ 101 $ 65 $ 15 $ 3

NSTAR Revenues and Net Income: The impact of NSTAR LLC and its subsidiaries on the revenues and net income attributable to controlling interest of NU on the accompanying unaudited condensed consolidated statements of income for both the three and six months ended June 30, 2012 was an increase of $601.3 million and $35.9 million, respectively.