康涅狄格電力 (ES) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Northeast Utilities 2002 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. I would now like to turn the call over to Mr. Jeffrey Kotkin, vice-president of investor relations. Mr. Kotkin, you may begin

Good morning and thank you for joining us today. My name is Jeff Kotkin and I am NU's vice-president of investor relations. Speaking to you this morning will be Michael Morris, NU's chairman, president and CEO, John Forsgren, NU”s vice chairman and CFO, Cheryl Grise, president of NU’s utility group and Chuck Shivery, president of NU enterprises, which houses our competitive energy subsidiaries. Mike, John, Cheryl and Chuck will provide an overview of the full year and fourth quarter 2002 and comment on what we see ahead for us in 2003. Also joining us for the call are Dave McHale, vice-president and treasurer, John Stack, vice-president and controller. John Roman, controller of NU enterprises.

Before turning the call over to Mike, allow me to read a short statement. Comments made during this investor call may include forward-looking statements within the meaning of the private securities litigation reform act of 1995 which are statements of future expectations and not facts. Actual results or developments might differ materially from those included in the forward-looking statements because of factors such as competition and industry restructuring, changes in economic conditions, changes in historical weather patterns, changes in-laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, volatility in electrical and natural gas commodity markets and other presently unknown or unforeseen factors. Other risk factors are detailed from time to time in our reports to the SEC. Now let me turn the call over to Mike?

Thanks, Jeff. I appreciate everybody being on the line. I know you are in the midst of earnings calling season. Some important utilities are reporting today as well. I appreciate you being here. We will be as forthright as we can and hopefully as quick as we can so we can get to your questions and make certain that all of your needs are addressed.

When we look at '02, we look at it with a certain amount of balance towards things that were accomplished and things that didn't work out as well as we wished they would have during that year. The last quarter in particular had a mix of good and bad news as well. As you know we finally closed on the sale of Seabrook stations and exited the operating nuclear business which is a bell weather day for the NU family of companies when you think of our history, both the days of sunshine and the days of clouds. That turned out to be an important sale. Cheryl will talk about some of the impacts on that on the operating companies, both in '02 and going forward in ‘03 and beyond.

When we look at the last quarter we also feel comfortable about the cost management, cost control we had in all of the operating companies, both regulated and unregulated as well as the corporate center group. I'm quite proud of the way our folks were able to do that. As many of the utilities you have heard from today and over the last few days and will over the next few weeks or few days, the weather was extremely cooperative towards the end of the year and got towards more normal conditions and that allowed some recovery of dollars lost in the early cycle of the year. As you recall, the first quarter of '02 was extremely warm on a national basis, and particularly so in our traditional service area. Chuck will go through some detail on the competitive businesses, those who were with us in October at the EEI meeting will recall that we thought a good band on the losses for that operating companies or those operating companies would be between $50 and $60 million. For the first time in awhile we actually came in a bit better than the halfway mark with losses of $54.1. That is not anything to cheer about. But based on the quarter to quarter performance in the unregulated businesses, we feel as though we had stabilized that platform. For the quarter, we were looking at $10 to $20 million in losses as we talked to you in October and we actually came in at $15.7, negative. Again, very much in the middle of that range with a number of issues coming in a plus sense and others coming in a minus sense. We still feel comfortable about the range for '03. We told you before we think $1.10 to a $1.30 in aggregate. John will break that out for you and Cheryl will give you some of the issues that will affect the regulated business in a constructive and in a negative way. Chuck will take us through the unregulated where we are still looking at 15 to 25 cents plus performance, which is of course a major swing from what we were able to accomplish in '02.

We have a number of critical political regulatory legislative issues going on in '03 that will set the stage for the operating activities in Connecticut in ‘04. Cheryl will talk a bit about that as well. Lastly I would close by simply updating folks as I frequently am asked to do anyway on the ConAd litigation. Most of you have been made aware the judge finally called for oral arguments on summary judgment on February 4, late in the day. It is hard to give any forecast to what that might mean other than that we hope the judge is finally focusing in on the issue. As you know, we feel and have felt all along that our case is very strong in that regard. I know there are others who feel they are on equally strong footing. But we will get a preview of how things go in a summary judgment and it will lead us to what we hope is the ultimate preparation in pursuing that case in the legal system and having an opportunity to wrap that up, at least in an initial decision sometime in '03. As we told you many times before, we believe that that has some very strong potential up side for us.

The biggest issue that Cheryl again will focus a bit on going forward with the company is the standard market design coming out of the federal energy regulatory commission which clearly is going to be a mid to late '03 event from meetings that we have all had with chairman Wood at the FERC. And of course, for us in the local sense, the implementation of location marginal pricing and the greater ISO New England market where we do the bulk of our business. So there are many things to look at in ’03 and we feel comfortable with the ranges we have been telling you about, both regulated and unregulated. At long last I look forward to a much more productive earnings year from Chuck Shivery and the unregulated group in '03. With that I'll turn the microphone over to John who will bring us up to date on the financial conditions and liquidity position of the company before he turns it over to Sheryl to talk about the regulated and Chuck to talk about the unregulated businesses. Thank you for your time and attention

Thank you, Mike. Let me start by running through the earnings numbers with you on our regulated subsidiaries. As you'll see in summary, our regulated companies had a very solid year in 2002. To start with, Connecticut light and power, which is our flag ship subsidiary, earned $80.1 million in 2002 compared to $104 million in 2001. Both of those numbers being after preferred dividends. The primary difference from year-to-year was nearly $20 million of one time gains we booked in the first quarter of '01 which were associated with the sale of CLMP's interest In Millstone. In the fourth quarter of 2002 CLMP earned $21.9 million compared with $32.5 million in the fourth quarter of the prior year '01. The primary difference for the quarter involved a favorable decision on tax issues regarding nuclear decommissioning and decontamination which benefited the fourth quarter of 2001.

Again in Connecticut our Yankee gas subsidiary earned $15.9 million in 2002, compared to $25.8 million in the prior year and the primary reason for the reduction was a third quarter 2001 after tax gain of about $10 million associated with the settlement of property tax litigation with the City of Meriden Connecticut. Fourth quarter earnings at Yankee were $9.6 million compared to $13.7 million in 2001. And the primary difference there was a favorable true up in the fourth quarter of '01 for income tax accruals.

Looking at western Massachusetts, we had a banner year earning $37.7 million in 2002, compared to $14.6 million in '01. The year 2002 benefited from a number of positive regulatory decisions, including the decision by the Massachusetts DTE to allow shareholders to retain the benefits of some $13 million of investment tax credits and finally, from the settlement of four years of transition cost recovery charges. That final settlement was approved by the Department of telecommunications and energy, DTE, on December 27. For the fourth quarter earnings of western mass electric were $10.8 million in '02 compared to $6.5 million in '01. And the primary reason was a portion of those regulatory settlements which occurred in the fourth quarter.

Currents in New Hampshire, we looked at public service New Hampshire and north Atlantic energy together. North Atlantic Energy is the holders of our interests in the Seabrook station. Together those companies earned $89.2 million in 2002 compared with about $85 million in '01. North Atlantic benefited in '02 from the reversal of the Seabrook unit two dismantlement accruals in the amount of $14 million after tax. For the fourth quarter, PS&H and north Atlantic together earned $22.1 million compared to $10 million in '01 and the primary differences there were colder weather and some one-time tax related items at north Atlantic in the fourth quarter of '01 and the effects of the regulatory order we received at the end of the year.

We wanted to point out to you that looking ahead to the year 2003 we have a number of items that will negatively affect the regulated companies compared to '02. First of all we do not see western mass having the same kinds of benefits from regulatory decisions that helped it so significantly in the year 2002. Secondly, the sale of Seabrook which occurred in November of 2002 has a number of effects. Obviously we will not have the material one-time gains in '03. So we will have a negative comparison on that. And in addition, we will lose all of the ongoing earnings which north Atlantic earned from the investment and regulatory asset.

More than $170 million of Seabrook proceeds were used to write down PS&H regulatory assets which we have been earning and allowed return of 8% on equity. Also as we noted to you at Edison electric conference earlier this fall, we will have a sharply lower pension credit in 2003. Coming down from $73 million which was accrued in 2002 to a currently projected $34 million in 2003. I want to note for you that about 30% of our pension credits are capitalized. So the income statement impact of the $39 million reduction is about $27 million pre-tax or 13 cents a share. These lower pension credits primarily effect Connecticut light and power an western mass electric.

The positive side, helping earnings per share, we expect and hope will be a return to normal or perhaps even colder than normal weather as we are experiencing in this quarter. That will have a significant impact on Yankee. And the comparison to the first quarter of 2002 was very strong because that was an extremely mild winter here in new England. Before I turn the call over to Cheryl [inaudible] and Chuck Shivery, I would like to add a few comments about balance sheet and liquidity. We focus a good deal on that in the environment.

On a consolidated basis, we ended the year 2002 with just under $2.3 billion of long-term debt, $113 million of short-term debt including current maturity, and $116 million of perpetual preferred stock. And then $2.2 billion of common equity. This gives us a balance sheet debt to capital ratio of 51%, against our benchmark target of 55%. We are below our leverage guideline, internal leverage guideline by a comfortable margin. As of today we have more than $600 million un-drawn and available on our $650 million revolving credit agreements. And about $30 million in addition available on CLT's $100 million accounts receivable line. On top of that, the northeast utility parent company has almost $300 million that is $290 million precisely of cash on the balance sheet which is being on lend to our subsidiaries in lieu of those companies utilizing credit lines.

Capital expenditures in 2002 totaled about $490 million and common and preferred dividends aggregated about $75 million. Between earnings, depreciation and amortization, including the Seabrook proceeds, we more than covered those cash needs. In 2003 assuming our regulated business, capital expenditures rise significantly as we are budgeting, particularly at CLMP. Our net cash flows will be as much as $100 million negative before the payment of $80 million in dividends. We feel, as you can tell from the numbers sited earlier that we can comfortably handle that without any pressure on the system. We believe that the level of capital spending is positive, given the minimal projected needs of our competitive businesses and the cash balance in general.

Going forward we have very modest maturities on all of our debt and sinking fund payments; $56 million in '03, $61 million in ’04, $88 million in ‘05 and $26 million in ’06, clearly a very modest pattern. We are reviewing our dividend, particularly in light of the legislation which will be coming forth in Washington. And we continue to plan on raising our dividend at an aggressive rate. The exact level will be determined later in the spring. In addition we continue to be interested in re-purchasing our shares as we are doing at the present time, especially as they are below book value. During 2002, we bought in about 3.6 million shares and we have authorization outstanding to repurchase an additional 7 million under our board authorization which will expire at the end of June. Thank you for your attention. I look forward to your questions later on. At this moment let me turn it over to Cheryl, president of our utility group.

Good morning. I probably met many of you at our presentation in October 2001 in Greenwich. And I look forward to meeting more of you in the future. I want to review some of the regulatory orders we received over the last month and discuss some of the key items for 2003. As John said on December 27 we received a final decision from the Massachusetts DTE approving a settlement we reached with the Attorney General on transition charges for the four year period of 1998 through 2001. Basically it cleared the deck of a number of items including accounting for the Millstone sale. We recorded a gain of about $6 million in the fourth quarter due to the reversal of certain accruals. Separately on December 27, the DTE approved a 1.8% increase in Wamego’s overall standard offer rate in part to reflect higher supply costs. On December 31 we received a positive order from the New Hampshire Public Utilities Commission allowing us to recover all but $17,100 of more than $200 million of deferred fuel costs. This order did not have any immediate cash flow impact since our 3.4 cents a kilowatt hour stranded cost recovery charge is expected to remain the same well into 2005. It did result in a gain of about $5 million in the fourth quarter as a result of the reversal of certain approvals. In four days, on February 1, 2003, PS&H will raise the supply rate for residential and small commercial customers by two mills to 4.6 cents a kilowatt hour. This increase is mandated by the 2001 restructuring legislation. Large commercial and industrial customers supply rate will also rise to 4.6 cents per kilowatt hour. We received a final decision setting the commercial industrial rate for the period February 2003 through January 2004 on January 16.

While the WMECO and PS&H’s stranded cost and recovery dockets well. We were not as pleased with the DPUC.'s January 13 draft decision on stranded cost recoveries associated with the Millstone sale. The DPUC denied the recovery of approximately $40 million of costs primarily related to the final Millstone 3 refueling outage, certain transaction costs and Millstone one. We filed exceptions to the order on January 23 and will argue our case tomorrow. We expect a final decision on February 19. Before discussing a bit about our operations, let me note a few items coming up for us in 2003.

The first is a strong possibility that with the standard offer period ending on December 31, 2003, the Connecticut legislature will revisit our 1998 restructuring legislation to determine where changes should be made. The regular legislative session ends the first week of June and we are working with both legislators and regulators on how those statutes can be improved going forward. Also around the beginning of July CLMP will file a distribution rate case that will be effective January 1,2004. As we know, CLMP customers have saved money for more than three years from below market supply contracts with NRG and select energy. How the expected higher supply congestion and location marginal pricing costs are reflected in CLMP rates going forward is an important issue. I should add that our transmission business is expecting a siding counsel decision on our proposed $135 million Bethel to Norwalk 345 K V transmission line in mid April. WMECO does not face any near term rate case. PS&H's 33 month rate freeze that resulted from the 1999 restructuring settlement will expire on February 1 of 2004. We will begin preparing for a PS&H rate case later this year. Yankee gas is dealing with an over earnings docket that we hope will be disposed of soon since we do not project over earnings at Yankee in 2003.

Before I turn the call over to Chuck let me speak a bit about utility operations. Despite an abysmal start due to the balmy first quarter, regulated retail electric sales were good in 2002 with one glaring exception which I'll get to in a minute. Residential electric sales were up 4.5% for the year and 10.7% for the quarter. Commercial sales were up 2.6% for the year and 2.1% for the quarter. Industrial sales, however, fell 7.7% for the year, 7.5% for the quarter. In part because of the economy and in part due to sharp drop off of sales to the pulp and paper industry in New Hampshire. PS&H’s industrial sales were off 14.5% for the year while residential sales were up 6.7% and commercial sales up 3.3%. We expect industrial sales to be flat in 2003 excluding the effects of a possible return of some of PS&H's paper industry sales, a recovery of those sales would make industrial sales rise overall. At Yankee gas, notwithstanding our strict cost control efforts we never recovered from the first quarter with firm volumes down 4.3% for the year. This is driven by a nearly 10% decline in residential sales, all due to weather. We are projecting modest gains in retail sales in 2003 and certainly are off to a great start in January. We continue to work aggressively to upgrade our facilities particularly at CLMP. We expect capital expenditures both on the distribution and transmission side to rise at CLMP in 2003 from around $250 million in 2002. Capital expenditures at WMECO and PS&H should remain stable and those at Yankee should rise somewhat, assuming we begin construction of the liquid natural gas storage terminal in Waterbury Connecticut. We are now in the siding and permitting process and we are hopeful that the DPUC's hearing process will soon provide us with the go ahead to place the terminal in rate way. From a reliability standpoint 2002 was not a great year. We avoided a serious brush with tropical storms, storm damage was significant especially following an ice storm in Northwest Connecticut in November. We are hopeful that our heavy investment in reliability project will have a visible impact over the years. I will turn the call over to Chuck. Thank you.

Thank you Cheryl. When I met with many of you at EEI this past fall, I provided a broad overview of the competitive businesses. We were able to stabilize the businesses and finish the year with a loss within the $50 to $60 million range that we described in October. We also remain comfortable with the profit guidance of 15 to 25 cents a share that we projected at EEI. Let me begin with a brief overview of 2002. Our wholesale business, which includes the generation assets of northeast generation company an Holyoke water and power approximately broke even in 2002. That was significantly better than the results we had forecast in October. The primary reasons include a return to more normal water flows through the conventional hydro electric plants, a positive change in the mark to market value of a New York power supply contract, and better performance in our whole sale book of business. Trading area loss $24 million. That's about $5 to $8 million worse than we had forecast and that change is almost solely due to negative mark to market valuation of New England contracts due to projected impacts of location marginal prices, which are anticipated to be implemented by the New England ISO on March 1st. Our retail business lost $28 million, as we expected. Our services business broke, essentially broke even in 2002, which was not as good as we had hoped. Select energy services performed as expected and earned $3 million. But northeast generation services lost $3 million due to a receivable write down of $2 million after tax, and lower than anticipated sales.

Back to 2003. I remain comfortable with our '03 range because of steps we have taken to reduce the amount of variability of results in our trading portfolio and our wholesale businesses. To reach our overall goals we will need to sign additional contracts at acceptable margins. But I'm happy to report we won the 560-megawatt [inaudible] load in 2003. We achieved additional success by winning a portion of the main standard service auction for the six-month period beginning March 1 of 2003. That is about 180 megawatts and $31 million in revenue. As we have said previously, we lost about $40 to $50 million recently on select energy's contract to serve CLMP. Because of more favorable supply pricing in 2003, we believe we can limit that contract to a small loss in 2003. As you probably know, that contract expires in December of 2003. We will also be bidding soon for a new standard offer load for the New Jersey BGS.

On the retail side, the weather has started more favorably for us than it did in 2002. Many of our losing contracts rolled off in December of 2002. Again we need to sign up additional customers to meet our break even target for retail. But 2003 is certainly starting off better than 2002. We have eliminated about 17 positions in the retail area as we try to make sure we side that business for the amount of business that we are actually doing and contemplate doing in the next few years. Those reductions plus the fall off in many of the unprofitable contracts and a more normal heating season are key factors in our ability to breakeven in the retail businesses in 2003.

Trading continues to be less significant, or a less significant part of our business. We only have about $400,000 capital risk on a daily basis now compared to up to $6 million a year ago. Also we continue to see a contraction in the trading activities with the whittling away of approved counter parties. Our services business has aggressive profitability targets in 2003, but we feel comfortable we will be able to achieve those. Let me turn this back over to Jeff. We can enter the Q and A session

I in turn will turn it back to the conference operator. She will give you some instructions on how to ask questions.

Thank you. We will now begin the question and answer session. If you have a question you will need to press the one on your touchtone phone. You will hear an acknowledgment that you have been placed in queue. If your question has been answered and you wish to be removed from the queue press the pounds sign. Your questions will be queued in the order they are received. If you are using a speaker phone, please press up the hand set before pressing the numbers. Once again if there are any questions, press the one on your touchtone phone. First question is from Paul Cole from [inaudible] capital

Quick question if I could. Can you detail how you accounted for the recent DPUC draft decision in Connecticut and also give us a schedule, sort of a schedule for the appeal of that decision going past tomorrow?

The activities that we will argue in the case tomorrow have a lot to do, Paul, with our view of some just raw arithmetic mistakes they had made treating unit two as though it was also jointly owned compared to unit three. I'm sure you read the order. Rather than allocating cost in the way we had done for the jointly owned unit, they decided a flat 67% across the board ownership interest would be appropriate. They erroneously applied that same 67% to some costs that were assigned to unit two which of course is not jointly owned. We believe that will be a pretty reasonable step for them to take as we go forward. We have also focused in on the refueling outage in the way they have calculated the amount of money that may well have been earned during the previous period when the plant was in more of a merchant function. The number of months times the dollars reserved on an ongoing basis for refueling outage is something that the commission might be willing to at least take a look at. As Cheryl mentioned it goes without saying we were quite disappointed in the overall tenor of the order. As we continue to look into it and some of the points that were made seemed reasonable, we as we typically we try to take a more shotgun approach in the petitions for reconsideration and we will take that same approach in rehearing. They are scheduled to, as I remember it, and Cheryl jump inhere and help me, I think February 19 is when the final order is called for, according to the schedule that they have laid out. We hope that they make some adjustments. To your question, as you know we had certain reservations going in to the '02 year because we weren't certain how they would treat that. We feel relatively comfortable with where we are. We think we will recover some of the ground but not all the ground this represents. That's a fair characterization. John Forsgren, do you want to add to that?

We booked the amount booked in the earnings for the year fairly close to the draft order. We hope that we will be able to recover, as Mike indicated a significant amount of that. That would represent up side to the numbers you are seeing today.

That would be recognized in the first quarter ‘03 or actually the fourth quarter?

: Assuming the schedule Mike laid out, that is the February 19 date, which is the plan, the day for the final order. That would affect these fourth quarter earnings in a positive way.

Fair enough. Can you give us some insight into the level of importance that, of the BGF option to select earnings, obviously you are one of if not the largest as fire under that current contract can you give us a sense of how important that is to forward earnings and how the competitive environment in the northeast has changed obviously with the number of generators getting into some financial problem and some traders marketers exiting that market?

Chuck, you want to take those?

The BGS option which goes from August to the --August of '03 to the end of '03 is probably going to give us somewhere in the neighborhood of, I think it's $475 million of revenue for a whole year. You have about half of that in that period of time. Depending on how much of that we actually win. You know you can apply the reasonable margin to that which would give you a sense of the amount of earnings potential for that. I will tell you that as we look forward in the wholesale book, in order for us to hit what we think are the appropriate budget targets we have a relatively small amount of gross margin left to book. And we've got about 50% of the gross margin booked in both the PJM and the New York areas. We need about $5 million of gross margin in New England. We have to manage that properly once we make those sales. But we believe that they are pretty attainable in terms of the kinds of opportunities that we are going to see going forward. Your second part of your question was I guess how do we see the change in the industry in the competitive businesses up here

Right.

Clearly the two big issues are the number of folks that are participating in the marketplace. We've seen a very, very significant reduction in the number of people that we can trade with. Or that we are comfortable trading with from a credit standpoint. Go back a number of years ago that number was 50 active counter parties and it's probably below 15 right now. That creates, obviously, a couple issues. First of all, in the trading environment you have to be able to get in an enter and exit position rather quickly. If you had reduction in counter parties it makes that much more difficult. From the pure standpoint of managing the portfolio, we are once to go out and buy a particular product you may have had a number of sellers readily available to you, those numbers of sellers have fallen. It makes the execution risk of managing the portfolio difficult. We have to build that in the way we look at the business.

Okay, great. Mike, finally, can you give us a sense of how you weigh the benefit of dividend increase versus share repurchase? And as you come up on [inaudible] again this year?

I think it's, it really is a balancing act, Paul.. We want to make sure we are rewarding our shareholders in a dividend sense and also in potential share value growth by repurchasing. As John mentioned, during this period where we are trading below book value, we continue to buyback shares and we will stay on that path for a while. And on the share repurchase side of things, of course, we are trying to balance that against the liquidity requirements that the rating agencies are placing on this industry. Maybe overly conservative in that regard from the rating agents. But after all of the debacles we have had in the larger utilities with credit and credit squeezes, we are trying to balance those two issues. John, you may want to add to that

I think some of the calculus will depend on the tax impact of the stuff going on in Washington and how it affects shareholders. That will certainly increase the value of dividends to shareholders. We are a full rate taxpayer in any normal year. That will change the calculus, and as Mike said, right now we are engaged in a balancing act. We think we definitely have a bias towards an upward dividend pattern which I think pleasantly distinguishes us from a lot of utilities in the world today. But we will be looking at various alternatives for increased dividends in the next couple of quarters.

That's great. Thanks very much.

Thank you, Paul.

Our next question comes from Jim Von Riesmann of JP Morgan.

Hi, Mike. This is for you or Cheryl. Could you talk about what Kevin Sullivan is wanting to do in the State of Connecticut now and what your goals are out of the pending legislation or at least the evaluation, people [inaudible] re regulating the Connecticut market.

For those of you who aren't familiar, Kevin Sullivan is the president of the Senate in Connecticut on the democratic side of the aisle and proposed that the legislature in '03 take a look at extending the standard offer service for a couple of years. During that two-year period, kind of visit restructuring in general and maybe if needed assign, go back to the California model, if you will, which is to say that the operating utilities can build, buy, or simply contract for the energy supply for their customers, which, of course, would be a considerable reversal. When we look at that at Connecticut light and power we see the whole legislative regulatory process as one with a lot of potential up as well as maybe an equal if not over weighted down side to it. Cheryl and Greg Butler and Peg Morton and Lisa Tibido and our regulatory legislative folks are working hard on that and I'll ask her to amplify. I don’t believe that when we survey the Senate in general and the House in particular, there's much of a signing on for the notion of going backwards. You'll remember different from the events from California, we had a robust generation development activities throughout New England, Connecticut among those although not as aggressive as some of us would have liked to have seen on the generation side. We are moving into a 40-odd percent reserve margin for '03 and beyond. As we look out in the decade, we don't see a need for generation in IS. New England until probably towards the later part of this decade. That's why, of course, John mentioned we are drawing back from what had long been stated, our intention to add to the generation portfolio on the unregulated side of the business. Having said that we do think there may be an appropriate way for us to build a not significant generation, two to maybe four hundred megawatts of true needle peaking electric generation that would shave peaks and add reliability, particularly in the southwest Connecticut area. And to that end, as you know, Jim, and others on the phone, that's one of the reasons we are trying to build out the transmission network. We are very pleased with the Pat Woods announcement of kicker basis points for those who build transmission within a given time line, those willing to sign on to an RTO. We are not prepared to take the divestiture step. We believe that transmission is a core competency of this company and has been for a lot of years. We are a multi state transmitter of energy which we think is a FERC regulated entity. When we listen to Kevin and see those stories, we see it as an opportunity to do constructive things. We are always worried in the legislative process about potential negative impacts. We feel comfortable we can probably control the negative side of that. Therefore we see it as an opportunity Cheryl, you surely are closer to the issue day in, day out

I think Mike covered it very well. We see the legislature that is struggling with the very laudable goals of competition, but recognizing the uncertainty that sometimes comes with that and is struggling with that versus predictable, stable, low rates. And I think a first reaction is let's go back to the old way, maybe that's better. This is something, as you said, Mike that we will have a lot of dialogue on over the next several months. I think we can come to a reasonable meeting of the mind with the legislature on this.

As a quick follow-up, is there any time line we should be thinking about with this legislation and some major road markers?

Well, Jim, as you know, the Connecticut legislature meets in a long and short session. The '03 year is a long session, which means that they will go, by normal schedule through the first week or so of June. So this is going to unfold in the not too distant future. However, we continue to struggle as do all the other states throughout the conterminous 48 with budgetary problems that are still center stage. I would be looking for some road signs here as early as March, I would think as to what people are thinking.

Great. Thank you, Mike.

You bet, Jim. Thanks for the question.

Our next question is from Jonathan Rojewski at Goldman Sachs. State your question.

Hi, everyone.

Hi, Jonathan.

I wanted to get clarity on the projected earnings improvement at the unregulated business.

So do we!

Sounds like the majority of it is coming from an improved or less of a loss relative to the Connecticut contract. And also you said it was going to require you to sign up more customers. Maybe I can get some sensitivities as to, you know, how crucial are the new customers and what gives you such a good idea that you are actually going to be able to recognize that growth there?

I'll let Chuck give some of the particulars, Jonathan. We do feel comfortable coming into '03 with the way we have been able to source the standard offer contract. As you know, we have tried before and will not stop trying to find a way to get some price relief out of the state on that issue. I don’t hold great hope for that in ’03, however events at NRG and excel may lend an opportunity for something like that to happen. We don't want to sit around and hope one of our sister utilities has such a negative event come their way. Notwithstanding that, we have sourced it in a different way. Our open position both on and off peak is considerably different than it has been before. Chuck and Bill Shivery and the unregulated team continue to close out whatever open positions we have on a rolling 60-day basis. That gives us considerably more comfort on that side. As to the customer additions, it's really -- Chuck again can give you more specifics. But it is really being successful to the question that Paul asked about the basic generation service. Will we repeat there? Will we be successful? We were with central Maine as Chuck mentioned with western mass electric. Will we be successful with other of the bids that come up in the '03 time line? Chuck, you want to add to that?

Just a couple things. I think there are some things that happened in '02 that we would not anticipate happening in '03. If you just think about it by business line, about $13 million, these are after tax numbers, of underperforming contracts expired in '02 on the retail side. We had an issue with gas sales on the retail side where we were caught in a position where we, it was very, very mild weather. Not only did we get the anticipated sales but we sold the amount of gas that we had bought into a declining market. Those things we don't anticipate will happen in 2003. Clearly we are not off to that start in '03. We still have a fair amount of sales that we have to get on the retail side. We have about 40% of the gross margin in place, but we need to continue to do that. On the services part of the business we essentially broke even in '02 and we see a fairly significant improvement in '03. Select energy services will continue to grow modestly off the $3 million number that they made in '02. And we expect to see a significant turn around in NGS from the loss they had to a positive number. Those things will give us a movement towards the goal. We are looking for a very modest profitability in trading. I think we are not going to be in a position where we will have the kind of significant loss that we did on the gas trading position last March and April. That cost us about $24 million after tax. We certainly don't have the capital risk in the trading portfolio right now to see that kind of loss. And then clearly in wholesale we have to make, we still have to make a few sales and we have to manage the portfolio. But I think we are moving along in the right direction. If we can have those things that happened in '02 not occur in '03, I believe we can, and continue to make the sales that we need to. I think we are going to be pretty much on target for '03

Great, thanks.

Thanks, Jonathan.

Next question is from Philson Yim of Morgan Stanley. State your question.

Good morning. Wondering if you can quantify the amount of rate increases you might be seeking at CLMP if any.

It's quite early in the process to do much of a forecast of what that looks like. It will have a lot to do with this ongoing legislative discussion and what we are able to accomplish going forward on the standard offer service activities as well. When we look at the general based performance at Connecticut light and power, as you know we have an over earnings sharing mechanism which we would like to continue going forward. We are seeing adequate returns on capital invested to date. The cost structure at CLMP, Cheryl and [inaudible] have done an excellent job at balancing the costs with the ever increasing needs of our people as we continue to add to salaries, add to the field work force, continue to spend more money on reliability and those issues for the company. So we feel comfortable going into the rate case that we will have cost increases that we believe we can demonstrate quite openly to the commission. However, a rate process and a rate proceeding as you know is always a walk into the wilderness. Our hope would be that through the legislative process and the regulatory process we can come to some general agreement what rates might look like in that '03, ‘04 or excuse me ‘04, ‘05 extended standard offer service. I can assure you of only one thing. That is, Chuck and his select energy group won't bid into a fixed price contract for ‘04 and ‘05. Cheryl, you may want to add to that.

No, you covered it well again, Mike. Thanks.

Thanks very much.

Our next question is from Rick Shelton of [inaudible] capital. State your question.

With regard to the buy back, I'm hoping you can give us some clarity as to how much cash is available on hand and how much free cash flow would be available for the buy back this year and also with regard to other opportunities where you may forgo the buy back, what type of opportunities you may be looking at.

John, why don't you take that one right from the top.

Sure. Rick, to go back to some of the numbers that we cited here, we are looking at approximately $300 million of cash on hand. Approximately $600 million of unutilized available credit facilities. A capital budget that would require a net $100 million. If we spent the entire amount, which is quite aggressive incidentally. The budgeted capital spending for '03 is $640 million compared to $490 million last year. That assumes we get the necessary regulatory approvals to do everything we would like to do. Assuming that, we would have a net need for cash in our businesses of $100 million. In prior years we have talked about making investments ingeneration to support the unregulated businesses. We do not see that occurring any time soon. We still don't believe that investment in generation is appropriate given all the factors Mike cited in terms of over supply in this region and the problems in that business. So we are extremely liquid and we are looking at this trade off of how to utilize all this cash. There are other opportunities in any given time, but we are not currently exploring any other active investment opportunities beyond what we have just talked about. So a great deal of liquidity needs to be managed. We are in discussions internally and with our board at all times on how most effectively to utilize the liquidity for the benefit of shareholders. At this time I can signal to you only a bias towards continued share repurchase and some increase in dividend

Okay, great. Just one follow-up would be for modeling purposes can I assume that you utilize all excess cash above and beyond what you've already budgeted for to buy back shares rather than make asset acquisitions or leave some sort of money market account?

I wouldn't make that assumption, no. It depends on where the stock, how the stock behaves. We have really adopted a bias of maintaining a great deal of liquidity because of the turmoil in the industry around us. And until the situation in this industry stabilizes, I think we are going to tend to maintain a great deal of liquidity. We believe it makes our shareholders more comfortable and probably we'll stick with that until we come out of the next few months of reviewing the situation.

John, thank you very much.

Okay, Rick.

Once again if there are any questions, please press the one on your touchtone phone. We currently have no further questions at this time. Were there any concluding remarks?

Well, thank you all very much for joining us today. If you have any further questions or anything in more detail, give me a call. And again, thank you for joining us. Take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for participating. You may now disconnect.