康涅狄格電力 (ES) 2004 Q1 法說會逐字稿

Good afternoon and welcome to the Northeast Utilities Q1 Investor Relations conference call.

At this time participants are in a listen-only mode.

Following the presentation we will conduct a question-and-answer session.

If you would like to ask a question, please press star one.

To withdraw your question you may press star two.

Today's conference is being recorded, if you have any objections you may disconnect at this time.

Now I will turn the meeting over to Mr. Jeffrey Kotkin from Northeast Utilities, sir you may begin.

Thank you and good afternoon 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 afternoon will be Chuck Shivery, NU's Chairman, President and Chief Executive Officer;

John Forsgren, NU's Vice Chairman and Chief Financial Officer;

Cheryl Grise, President of NU's Utility Group; and Bill Shiveley Interim President of NU Enterprises, which houses our competitive energy subsidiaries.

Chuck, John, Cheryl, and Bill will provide an overview of the first quarter of 2004 and comment on what we see ahead of us for the balance of the year.

Also joining us for the call are John Stack our Vice President and Controller;

John Roman Controller of NU Enterprises; and Dave McHale our Vice President and Treasurer.

Before turning the call over to Chuck, 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 condition, changes in historical weather patterns, changes in laws regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, volatility in electric and natural gas commodity markets, and other presently unknown or unforeseen factors.

Other risk factors are detailed from time to time in NU's reports to the Securities and Exchange Commission.

Now let me turn over the call to Chuck.

Jeff, thank you and good afternoon, and thank you all for joining us on a very busy earnings reporting day.

This is NU's first earnings call since the Northeast Utilities Board entrusted me with the leadership of NU, and I look forward to meeting with many of you over the next several months.

Before we discuss our quarterly results, I'd like to spend a few minutes describing why I believe NU can be a very attractive investment over the years to come.

I firmly believe that NU has a unique opportunity to create an attractive earnings and dividend growth as a result of investment opportunities in our electric distribution and transmission systems, and our natural gas distribution system, and through improving the execution of our competitive business strategies.

Our growth will largely be propelled by the investments we'll need to make in our electric and natural gas infrastructure if we're to properly serve our New England customer.

At the end of 2003, our undepreciated regulated property plant and equipment totaled approximately $4.5b including projects under construction.

Our regulated capital expenditures over the next five years are expected to exceed $3b, or nearly three times our total projected depreciation over that period of time.

If we increase our net T&D investment by $2b by the end of 2008, an increase driven by the need to maintain reliable service to our customers, and if we can earn a reasonable return on the increasing levels of equity in our regulated companies, we believe we offer investors a very compelling opportunity.

We are committed to the creation of a stronger more reliable electric grid in New England through the siting and building of electric transmission facilities.

That work is not only critical to maintaining a highly reliable electric grid, it is key to producing a competitive electric market place in New England.

Before addressing the first quarter, I should note that we've embarked on a comprehensive review of each of our business lines.

This initiative began in January and is intended to evaluate both the prospects and the effectiveness of each of our businesses.

It will focus on both the strategy and continuous improvement opportunities available to each of these business lines.

We see no overall shift in our previously articulated strategy and there are several key initiatives we'll continue to pursue.

For example, we've already received Connecticut Regulatory Approval for a four-year $900m upgrade of CL&P's electric distribution facilities and we'll complete that.

We've proposed two major transmission lines in the Southwest Connecticut.

One has been approved by the Connecticut's Siting Council and the other is pending.

We expect to complete both of those projects.

We'll continue to expand our retail and wholesale energy marketing business, and earlier this week announced our first wholesale contract in the state of Maryland.

However, there are some longer term issues that we plan to address such as how we serve a growing market presence in the PJM Power Pool, what transmission work is needed in our region outside of the lines in Southwest Connecticut, and how to grow our energy services businesses.

We would discuss these results, all the results of these initiatives as we move through the year.

Now, let me turn to the quarter.

We're pleased with our performance over the first three months of the year.

We're in $67.4m or $0.53 per share compared with about $60m or $0.47 per share in the first quarter of 2003.

This level of earnings is somewhat ahead of our budget from the first quarter, largely due to better than anticipated regulated energy sales.

However, at this time, we're not adjusting the earnings range we set last October of $1.20 to $1.40 per share.

We still need to see how the summer enfolds and how the PSNH rate cases resolved.

I'll leave to Bill Schivley the pleasure of detailing the improvements in the competitive business, but allow me to note that the competitive businesses will have a very different quarterly earnings profile in 2004 compared to 2003.

We expect first half competitive business earnings in 2004 to be well ahead of results in the first half of 2003, when those businesses earned approximately $17m.

But second quarter 2004 earnings for those businesses are projected to be significantly below the results in the same period of 2003.

Year-over-year changes in the third, and fourth quarters are expected to be much less dramatic excluding our fourth quarter of 2003 $36m standard market design settlement charge.

We continue to estimate that earnings at the competitive businesses will be in the range of $28m to $38m or $0.22 to $0.30 a share, but I would note that based on our first quarter results, we now expect to be in the mid-to-upper range of that estimate.

Cheryl Grise will provide you a more detailed update on our regulated businesses.

We're quite pleased with our overall performance in the quarter.

We were not affected by any major winter storm, and sales were strong.

Our four regulated businesses earned a combined $53m in the first quarter down from the $58m in the first quarter of 2003.

But those lower earnings, largely reflect anticipated higher operating expenses including about $3m in after-tax depreciation costs, and $2m in after-tax pension costs.

At CL&P, those higher costs are now being recovered for a distribution rate increase that took effect January 1, but those cost increases are starting to stress returns at our other regulated companies, and Cheryl will detail some of the distribution company rate applications we are considering.

As you know, we have two rate cases currently pending.

In late October 2003, the Federal Energy Regulatory Commission allows us to raise our transmission rates by nearly $24m annually, subject to refund, pending a final decision in a rate case that may not be decided until early next year.

The higher transmission revenues and a 11.75% requested return on equity are reflected in our first quarter results.

In New Hampshire, we have a retail rate case pending that may not be deciding for late this year.

The New Hampshire Public Utilities Commission turned down our request to implement the requested $21m annual increase subject to refund, even though the ultimate decision would be retroactive to February 1, 2004.

Accordingly, we did not record any additional PSNH revenue in the quarter.

We are requesting a return on equity of an 11.2% at public service in New Hampshire.

We continue to believe we will produce better regulated earnings in 2004 than we did in 2003, but expect much of that relative improvement to occur late in the year since in 2003, the relatively weakest quarter for the regulated businesses was the fourth quarter and that was due to unusually warm weather, as well our write-off from the CL&P rate decision.

Before I turn the call over to Cheryl, let me update on the status of two significant legal cases.

First item is our lawsuit against ConEd for failing to close on our merger in 2001.

Arguments were held in New York Federal Court in late March on who is the rightful plaintiff, NU representing NU's shareholders of today or NU's shareholders of March 5, 2001, and ConEd said it would not close the merger on the original terms.

We expect a decision on this topic soon, but we do not expect this case to go to trial until late this year at the earliest and more likely 2005.

The second item is the appeal of our $200m, 345-kV Transmission Project between Bethel and Norwalk, Connecticut.

The City of Norwalk has fueled that project and on May 19, the Superior Court issued a decision dismissing two of Norwalk's claims of air.

In hearing on the merits of the remaining claims of air is scheduled for July 12.

At this time, we do not believe the court case would delay our plans to place the lining service by the end of next year.

On a related but separate transmission project, we are now in the midst of Connecticut Siting Council hearings on a joint project with electric eliminating to build a 345,000-volt transmission circuit for Middletown, Connecticut to Norwalk.

This line is projected to cost approximately $600m based on our preferred sighting design, which is now before the Connecticut Siting Council.

As proposed that line would be about one-third underground and two-thirds overhead.

Other certain property owners along the overhead sections want those parts undergrounded as well.

We expect a decision from the Siting Council around the end of this year.

These two projects have the highest profile but they are far from the only transmission projects we are overseeing.

This spring, we will complete a $40m upgrade of a substation in Stanford that will allow us to import more power at peak times into far Southwest Connecticut.

We are also working with towns in the area to build a new 115,000-volt underground line between Norwalk and Stanford.

All told, we have budgeted for 2004 nearly three times the $99m we spent in 2003 on transmission projects.

Whether we spend that amount of course will depend largely on the progress of the Bethel and Norwalk line.

Thank you, and now I will turn the call over to Cheryl Grise, the President of our Utility Group.

Thank you Chuck, and good afternoon everyone.

As Chuck mentioned, aggregate earnings at the regulated businesses fell in the first quarter of 2004 compared with the same period of 2003.

Nevertheless, we are pretty much on or ahead of the budgeted earnings pattern Chuck noted earlier.

Retail electric sales overall rose 2.7%, mostly reflecting economic growth.

Residential electric sales rose 1.5%; commercial sales increased 4.1%, while industrial sales rose 2.5%.

Burn gas sales rose 6.8% compared with the first quarter of 2003, primarily because we made a negative un-build revenue adjustment in the first quarter of 2003, the first of two such adjustments at Yankee in 2003.

Otherwise, Yankee Gas sales were down about a 0.5% compared with the first quarter of 2003.

Now let's look at each of the companies, Connecticut Light and Power earnings rose to $26.2m in the first quarter of 2004 compared with $25.3m in the same period of 2003.

You may recall that first quarter 2003 results included about $0.02 a share in gains from an adjustment to reserve CL&P had taken relating to the sale of the Millstone Station.

In the first quarter of 2004, distribution and transmission rate increases and a 2% increase in retail electric sales at CL&P more than offset expected higher depreciation and other expenses and lower pension income.

I should note that during the first quarter, CL&P appealed the DPUC's rate decision to the superior court and simultaneously asked the DPUC to change certain discreet aspects of its final order.

One key item in the appeal area deals with the DPUC's order that we write off nearly $16m of pension assets that the DPUC had originally deferred about 10 years ago.

The DPUC has agreed to take another look at the pension write-off and a couple of other issues and to make a final decision in June.

If the reconsideration turns out well, we will drop our court appeal.

If the DPUC reconsiders all or part of the pension asset write-off CL&P booked in the fourth quarter of 2003, we will record a reversal when we receive such a decision.

Turning to public service company of New Hampshire, they earned $11.8m in the first quarter of 2004 compared with $10.8m in the same quarter of 2003.

The increase is mostly attributable to a 6.9% increase in retail sales.

That increase was driven by an 8.4% increase in industrial sales and the impact of taking over 11,000 customer accounts from Central Vermont on January 1st of this year.

As Chuck mentioned, PSNH is currently involved in its first general rate case in nearly two decades.

We are currently responding to data requests, staff and Intervener Testimony is due May 28th and hearings are scheduled to commence August 2nd.

A decision would not be likely until the fall, but I remain hopeful that we will be able to settle the rate case as we have been able to settle a number of issues in New Hampshire in recent years.

Another item that we are tracking closely in New Hampshire is our proposal to convert one of the three 50 Megawatt coal and oil burning units at Schiller Station to burn wood waste.

The project was approved by regulators in February, but they imposed some risk sharing provisions that we do not consider fair to our shareholders.

We subsequently negotiated a settlement with the fair of risk sharing mechanism and asked the New Hampshire PUC in March to approve the settlement that would allow $70m project to proceed.

We continue to await that final ruling.

Now turning to Western Massachusetts Electric Company.

This company earned $3.5m in the first quarter of 2004 compared with $6.1m in the same period of 2003.

The sharp decline was impacted by lower pension income and higher depreciation and interest expense.

These trends increased the likelihood that we will file a rate case when we go in 2005.

And finally to Yankee Gas, Yankee Gas earned $11.9m in the first quarter of 2004 compared with $15.8m in the first quarter of 2003.

The primary factor in the lower Yankee earnings is a change in Yankee's rate design in August 2003 that increased Yankee's fixed demand charges and lowered Yankee's variable energy charges.

The impact will benefit customers and the company by helping to smooth out revenues through the year.

As a result though, it will decrease earnings in the first and fourth peak usage quarters and improve results in the second and third quarters.

But Yankee also had higher interest pension, and depreciation charges and we continue to struggle to achieve the company's allowed return on equity.

The most significant issue is that Yankee's most recent rate case was litigated back in 2001 when pension income was at its peak.

As a result, the DPUC imputed an unsustainable level of pension income into Yankee Gas rates.

As pension income at Yankee has turned into pension expense, Yankee has had no way to offset the change.

As a result, we expect to file for rate relief at Yankee this summer with new rates to be effected in 2005.

With that let me turn the call over to John Forsgren, our Vice Chairman and CFO.

Thank you Cheryl.

Let me start by covering our capital investment program, and the methods by which we were managing to retain a high level of financial flexibility and liquidity during the execution of this program.

Let me start by saying that this entire capital program relating to regulated capital investments is being carried out with the full support of all the Regulatory Agencies that cover these issues including the

The Connecticut Department of Public Utility Control and the New England ISO.

As we've discussed before, we budget our capital spending based on all of our projects being completed on time.

When we are dealing with the kinds of major projects that we are now, which requires extensive regulatory review and public input, schedules can become extended.

In both 2002 and 2003, we under-spent our budgeted capital levels by almost $100m per year.

In 2004, we project our capital spending at a new record of $738m excluding AFUDC.

Through the end of the first quarter actual capital spending totaled a $129m or about $45m below budget.

Our plan is to catch up on some of that as we go through the course of the year, because earnings and cash flow have been strong this year and capital spending has been below budget.

Liquidity remains quite high.

As of the start of this week we had nothing borrowed on our $300m regulated company revolving credit line and only $65m of letters of credit accessed on our corporate $350m credit line.

Additionally CL&P has drawn only $60m through its $100m accounts receivable line, which we expect to renew this summer for an additional three years.

During the first quarter, we completed the sale of $75m of 10-year first mortgage bonds at Yankee Gas at an attractive rate of 4.8%.

CL&P has an application pending before the DPUC to issue up to $280m of long term debt this year primarily to pay down short term debt, but also to refund the small issue that comes out of call protection this June.

CL&P has asked the DPUC for permission to issue another $600m of debt that we expect to issue between 2005 and 2007 to finance our ambitious transmission and distribution investment program.

At PS&H we have an application pending to issue up to $200m of debt through 2006 including $50m in 2004 to finance its capital program including the Shiller Unit conversion that Cheryl talked about earlier.

It's important to note that we believe we can complete this investment program with a relatively modest increase in our current consolidated leverage over the next few years.

Current leverage is around 52%.

Reserving a strong credit profile is key to our efforts to finance this program on an attractive interest rate.

The need to preserve the strong balance sheet was underscored recently when Standard & Poor's lowered its outlook on the NU systems negative from stable and at the same time in a related action it lowered it's ratings on our Northeast generation company to BB plus from BBB minus.

We understand S&P is rationale, they are taking a very cautious outlook and view on the merchant energy industry at this time.

We believe they were using very low long-term natural gas prices in our forecast and that negatively affected NGC's profitability in the merchant energy scenario.

We also understand that S&P like the other agencies want to be sure that we do not leverage up our regulated companies as we improve our energy delivery system.

We continue to invest additional equity in those companies.

In the fourth quarter of 2003, NU invested $40m of equity in PS&H and in the first quarter of this year we invested another, almost $12m together in the equity of CL&P and Western Mass Electric.

For the first time this quarter, as you'll see in the press release, we have issued preliminary cash flow statements with our earnings release, this is part of our effort to continue to improve the transparency of our business.

You'll note that cash flow from operations were significantly stronger in the first quarter of 2004 than they were in the first quarter of 2003.

A large part of that was due to the fact that in March of '03 we paid about $90m in taxes related to the November '02 sale of Seabrook.

Strong 2004 cash flows in the first quarter allowed us to actually lower our debt levels net of cash by about $50m during the first quarter.

We expect that to change somewhat later in the year as the capital projects that Cheryl and Chuck have both talked about commencing capital expenditures begin to rise.

Let me turn the call over now to Bill Schivley who is Interim President of our Avenue Enterprises, our unregulated activities.

Thanks John and good afternoon everyone.

NU's competitive businesses had the best quarter ever this winter earning $18.8m, this represents nearly a four-fold increase in earnings in the same quarter of 2003.

As Chuck mentioned you cannot multiply the $18.8m by four to estimate our 2004 earnings.

The way our sales contracts were executed in source, the first quarter was budgeted to be our best quarter of the year.

This occurred because of the contracts under which we are buying power from our suppliers have a relatively constant rate throughout the year.

However some of our full requirements -- wholesale contracts have pricing that peaks in the winter and is at its lowest in the second quarter.

As a result our wholesale group earned $16.8m in the first quarter compared with less than $7m in the first quarter of 2003, but as Chuck stated earlier, earnings for our wholesale group in the current quarter are projected to be significant below results in the same period of 2003, because of the lower second quarter sales pricing, as compared with the first quarter of 2004.

Overall, our wholesale book looks quite good for 2004.

Earlier this week, we announced that we were the successful bidder to supply 1,300 megawatts to New Jersey and Maryland utilities, over the next three years.

With that successful bid and first quarter results behind us, we now have secured nearly 85% of the margin we need to reach our targeted gross margin for the wholesale businesses in 2004.

Over the balance of the year, we still need to originate additional sales and just as importantly, we need to manage the portfolio, as well as we have over the past 18 months.

So, that we realize the profits we project based on the margin build into our successful bids.

Our retail electric and natural gas marketing group earned $2.3m in the first quarter of 2004 compared with a loss of nearly $2m in the first quarter of 2003.

We are very excited an optimistic and believe the retail group will have its first profitable year in 2004.

We have now contracted for approximately 70% of the gross margin we need to achieve retail marketing's earnings targets.

Turning now to our energy services group, we got off to a relatively slow start this year, due to the bitter January weather and the economy for commercial construction in New England.

The services business has lost about $200,000 in the first quarter compared with a profit of $400,000 in the first quarter of 2003.

However, we continue to estimate that these businesses would earn between $4m and $7m for the year.

That would be following earnings of $2.6m in 2003.

The services businesses to date have signed contracts accounting for approximately 75% of the gross margin needed to reach their 2004 earnings target.

Now let me address a question that has been raised many times over the last month regarding transformer deratings at the Branchburg substation owned by Public Service Electric and Gas in New Jersey.

The transformer problem has the effect of raising congestion costs in PSE&G and Jersey central zones where Select Energy serves basic generation service load.

As a result of these transformer deratings, Select has incurred a limited amount of higher congestion costs to date, mostly in the final week of March.

PJM and PSE&G continue to explore avenues to mitigate the problem and have announced that a new transformer will be installed by June 30, of 2005.

Select has urged PJM to discuss in a public forum the avenues that are being explored to address both reliability and economic impacts associated with this interim period until the new transformer is installed.

However, to be fully protected from future congestion that may occur to the Branchburg situation, Select has purchased financial transmission rates for the May 2004 through May 2005 period, a few weeks ago in the recent PJM auctions.

As a result, we expect a higher congestion associated with the Branchburg transformers to have a minimal impact on Select results.

Before I conclude, I want to tell you the competitive businesses are off to a very good start and to reiterate Chuck's comments, we do expect to earn in the middle to upper end of our target range of $0.22 to $0.30 a share.

Thank you very much for your time and now let me turn the call back to Jeff.

Thank you very much Bill, and I will turn the call back to Christine, our conference operator for your questions.

Thank you sir.

At this time, we would like to begin the formal question and answer session of the conference.

If you would like to ask a question, you may press star then one.

Once again, if you would like to ask a question at this time, please press star then one.

To withdraw your question, you may press star then two.

One moment please for the first question.

Christine, do we have any questions?

Yes sir.

The first question from Asher

with NBC

, you may ask your question.

Good afternoon and congrats on a nice quarter.

Can you just mention the happy on the retail side of the business that's kind of improving the $2.3m profits, is that something we can expect positive results for each quarter going forward?

Asher, let me ask Bill Schivley to answer that for you.

First of all, we surely hope so.

We are very pleased with the performance and we expect it to continue.

The business seems to be turning around in some of the issues that we had mentioned last quarter, we have taken care then we were just -- real optimistic about the business.

Can you tell us about the business?

I am very happy, I guess you are starting to show positive variances in all aspects like constellation, and great

.

They have nearly about 10% to 15% and sometimes much higher growth factors, going forward, as they see the business of your perspective as you look forward and in terms of your backlog and how you are approaching this business?

Can we see double-digit earnings growth from this side of the business, going forward?

We would surely hope so.

Certainly on that retail side we would see the business growing in a double-digit framework over the foreseeable future.

And similarly on the wholesale side?

Yes.

I would say so also, yes.

Okay.

And then if I can go to the regulator side, I guess you mentioned, can you just mention what the amount of the rate case at Yankee could be which would be filed this summer, and what kind of revenue you mentioned on WMECO would you be looking to file early part of next year.

Yes.

We're still evaluating that in

cases, I'm sorry to tell you, I can't give you a specific answer on either of those yet.

As I said, we're simply contemplating filing one in Western Massachusetts and we're actively preparing the case of Yankee.

But we have not developed those numbers yet either.

Can you tell us what are your earning on Yankee currently on a twelve-month basis?

Yes, we're earning about 5% and an allowed of 11%.

Okay, and what about WMECO?

WMECO is I believe about 8%.

And what's the allowed over there?

There isn't an allowed there.

There isn't an allowed.

Just to confirm, you know competitive side is running in the first quarter ahead and I guess you mentioned your will end up at the upper end, and if I heard rightly, the regulated side is also running ahead of budget after the first quarter.

Would that be a fair characterization?

Yes.

The regulated side is slightly ahead of budget in the first quarter.

But there are three more quarters to go and a lot of the issues around the regulated side we deal with, how the summer unfold as well as how some of the rate cases unfold.

On the unregulated side I think we said we expect the first half comparison to be better than the first half of 2003 and we anticipate that on a year-to-year comparison for the competitive businesses would be at the middle to the upper end of the range we gave you.

Okay.

And just on this appeal process, you said the appeal is on the hearing on the

Will that --you are saying that that will not impact your construction program on the transmission side?

Right now, we do not anticipate that appeal impacting the completion date of that transmission project which is at the end of 2005, but we clearly have to see how that turns out.

Okay.

Thank you very much and congrats.

Thank you.

Next call is from Paul Fremont from Jefferies and I am going to turn the call over now to Paul.

Thanks.

May be a quick follow up to the last set of questions on, if you are on target or actually ahead of target at the Utility and you certainly have the original variance that you set up, which I guess for the regulated business float between $1.08 and $1.20 and you know you are ahead, on the competitive side with most of your contractors, why not narrow your guidance range to reflect either on the regulated business or other than weather I guess, or in the competitive operation?

The usual variables you would look to in the Utility, obviously the summer season is important for both regulated and unregulated operations here.

As we said, the execution of our capital spending program is important although, it doesn't have dramatic effect on bottom line this year.

It has an accelerating effect over time.

So, executing that is obviously the key.

Rather than that, no specific variables that I think would be --the rate case variables Cheryl points out, do you want to

Yes, just a PS and its rate case the outcome of that which we don't expect to see until probably third quarter.

And then the last question is

to the $0.53 was the numbers that you provided in the press release;

I assume the difference in dollars is current company losses that aren't broken out in your tax, is that accurate?

Paul, that's accurate.

We have some debt associated with some acquisitions and that is the difference.

Thank you Paul.

Next, we will turn to a question from Jay Yannello from UBS.

Jay, you're up.

Okay, good afternoon.

Kind of following up with this discussion on the unregulated side.

My usual question, was there any magnitude of mark-to-market in this quarter in the Select Energy business which might be contributing to the conservative?

Thank you.

This is Bill Schivley.

Very, very little.

As we reported in last quarter for the year, it was minimal in '03 and it's less than $0.5m in the $18.8m.

Okay.

Thank you, Jay.

Next question comes from Jeff

from Millennium, Jeff, could your ask your question?

Good afternoon.

I wanted to ask, what competitive businesses are in our EPS basis last year?

In the first quarter, Jeff?

No, actually for the whole year.

That's a matter of -- I'm assuming you are asking with not including the SMD charge that we took at the end of the year.

Right.

About $0.25 a share.

Okay.

So, looks like in the first quarter of '04, you came in at $0.15 on that business versus $0.04 in the first quarter of '03.

So, as we look at the rest of the year, I know in the press release you indicated the second quarter to be weaker year-over-year, how does the second half look, given that you are already halfway there to your target?

As we mentioned in the press release and also in the comment earlier, with that shaping issue we talked about will have an impact, but if you look at the third and fourth quarters, we would the performance in this year to be similar to what we posted last year.

I'm sorry, the shaping comments, could you repeat those?

Yes.

That was the sourcing issue, where we have brought some power for our contracts at a flat fixed rate versus making the sales, I believe referred to this as a shape rate, which is more of a monthly rate, varying higher and lower, a true market condition if you will.

Okay, and then I saw the press release two day's ago.

It looks like Select is very successful, both in Maryland and New Jersey in the BGS Auction?

Could you comment, I think did you participate in the previous auction?

Absolutely, we've been successful in the first three years of the BGS, all three years of the BGS.

Okay.

And could you comment just in general, not specific numbers, but it looks like you secured a lot of load in the last auction in New Jersey.

What did you see in margins versus the auction a year earlier?

Well, I would say probably making a general comment without getting specific.

Probably in the first year, the margins tended to be higher and probably this last year, they tended to be lower than they have been previously, and I would think one of the reasons for that would be just a competitive nature and also the level of the auction getting much more sophisticated.

Sure.

Okay, and is that, I mean it looks like you probably procured more or servicing more, I should say.

But is that a factor that goes into the second half year-over-year, the margins on that business a little lower?

Yes, absolutely.

Okay.

Great, thank you.

You are welcome.

Next call is from Mike

from Zimmer Lucas Partners.

Mike?

Good afternoon.

With regards to Yankee Gas, you pointed out that, it's mainly on last case, pretty specific 2001 had been a very high level of pension income, which has now turned to an expense.

Can you tell us how much has that changed then?

I think it's about $7m, so $7m affect on us now.

And can you also, perhaps help in sense of incremental capital rate based additions that have been made since then they are not currently reflected in any other major cost items that you will be addressing in your summer filing?

I'm going to tell you a ballpark, it's about $9200m.$90m to $100m.

In aggregate?

Yes.

Okay.

And are there any other comparable operating expenses that you would highlight upon, as you did with the pension, that will be highlighted in first case now, pensions is really the large issue and will be the heart of the case.

And if you file it in summertime, what's -- can you remind us what the time line is such that if rates will be affective for full heating season in 2005 or will possibly be only there for a partially period?

No.

It depends on where you start the heating season.

We'll file -- I notice a letter of our notice of intent to file a case on June 1 and actually filed the case on July 1.

The commission then has a 150 days to disposition that.

So we'd get a final decision before the end of the year for rates that will go into effect on January 1.

So, in as much as the heating season does start somewhat before the calendar year starts, we won't have those rates for the entire heating season.

But I did talk in my remarks earlier about the way that we have really rebalanced customers’ rates, so we expect to be less impacted by the weather than we have in previous years.

But for our own purposes we can work on the presumption of whatever rates you would receive will be in effect for the full calendar year of 2005?

Yes, that's absolutely correct.

All right.

And one last thing, given the night turnaround balance from select, particularly with respect to PGS, New Jersey, and in Maryland and things of that nature, my recollection was is that the original business model had contemplated being in other areas of the country outside the Northeast that's part of being growth platforms for, to recollect that you discussed earlier in terms of double digit type growth.

Will you focus exclusively in the kind of Northeast mid Atlantic sector still or do you, foresee yourselves kind of starting to maybe little bit beyond that?

No.

The latter is true, we are going to focus on the Northeast area including the mid Atlantic area, and we'll follow the three power pools.

New England, PJM, and New York and if there is some expansion opportunities with the PJM expansion, we will probably certainly look at those very hard, but that's always been our model and remains our model.

Thank you very much.

Your are welcome.

Thank you Mike.

Our next question is from David Grumhaus from Copia Capital.

David?

Good afternoon.

Hi.

Couple of questions for you.

One what was the last four-month ROE in New Hampshire?

Are you under OE?

12-month basis.

I want to say low teens.

Low teens?

Low teens.

That's ballpark, correct.

Okay great.

The rate design at Yankee, you mentioned that it is switched and that it was going to cause some rebalancing in the quarters.

Can you tell us what effect that had in this quarter?

Yes, I can.

In this quarter, it was worth about $2m in earnings in the first quarter impact.

Okay, great.

Last question.

You all talked about being able to grow the wholesale business selecting, continuing to grow at a sort of a double-digit growth.

Will that require either more investments from the balance sheet perspective and or having more generation or can you do it off the current balance sheet and current plans that you have?

Well, its a very good question, in fact as Chuck alluded to it earlier, we are going though some well under range five-year business strategic plans and we are going to be looking at all those different options and how best to grow the business.

I think at this point in time, we sort of reserved comment on whether we are going to do it with the hard way or do with the old fashion way.

Okay.

Thanks for the time.

Thank you David.

Next call is from Gregg Orrill from Lehman Brothers.

Gregg?

Thanks, good afternoon.

Just a real quick question, you had mentioned you've purchased the transmission capacity, I guess in New Jersey last week and I was just curious as to whether if its public, how much was paid there?

It's not public and obviously, we would prefer not to intimate any public discussion over it for competitive reasons.

But we were successful in the auctions and we spend a lot of time in doing it.

We look at the FTR's financial transmission rates as excellent ways to hedge our positions there.

And that way, we are not subject to what's going to happen with the branch per transformers, should there be some serious congestion in the summer.

Is it, can you describe how much the capacity watt?

I prefer not to at this point.

I believe at some point in time some of that information will become public, in the public record and I think we'd prefer to have it handled that way.

Okay.

Thank you.

Thank you.

Thank you Greg.

Next Call is from Zack Schreiber from Ducane.

Zack?

Hi guys congratulations on a good quarter.

A follow-up on the previous question and Bill's comment there.

So, Bill are you saying that really that we can rotate the issue of the Branchburg derating off the table or should we take it off under a sort of most reasonably foreseeable scenarios are there, those scenarios sort of on the tail end of any risk curve that we're supposed to?

Well we have done a lot of analysis and we believe and through these actions with the FTRs that we've acquired that we basically hedged our position, and would want you to probably remove that from the table or the things you're considering about us.

Great.

Thanks so much guys.

Congratulations on good quarter.

Thanks Zack.

Next question is either Mike Weinstein or

back in Zimmer Lucas.

Thank you.

On that same New Jersey transmission congestion issue, I wondered can you perhaps help us understand a little bit that -- I understand that you bought these transmission rights and you have hedged off your rates and we don't have to worry about it, but can you maybe -- perhaps explain to us such that we generally understand what type of potential risk had been posed to you from that, what type of financial exposure may have existed that you basically mitigated through your actions?

Well I guess I had limited to some of the public comments that the PJM has made and also with PSE&G.

They have referred to congestion costs, as a result of this derate down to 30% derate, you would have potential congestion I think up to about $10 a megawatt hour.

So, if you estimated somebody's load you can sort of calculate what the upper end of that could be, and I would suggest that could be for significant players in the areas and several millions of dollars.

Okay.

Thank you very much.

You're welcome.

Thank you.

Looks like we have a call from Andrea

from

.

Hi, just a quick follow-up on Branchburg issue.

You had mentioned that the period that you have bought the FTR's through is May '05, is that correct?

That's correct.

And can you just explain to us how we should expect to see the cost of those FTRs flow through, and if you recognize them all next quarter that -- were they recognized this quarter or it's spread over the period through May '05?

Yes.

I believe it will be spread through the '04 to '05, May '04 to May '05.

Okay.

So those costs are actually recognized as the FTRs that you used?

Yes.

Okay.

Thank you.

At this time, it doesn't look like we have any more questions, I will turn the call over to Chuck.

Well I want to thank everybody for their attention, again as I said during a I'm sure a very hectic earning day for all of you.

I do want to expand on just one answer that Bill gave and it was a question about purchasing generation.

We are, as he said, looking through the strategic opportunities of all of our companies and clearly, I think if you look out long-term the ability to control generation maybe critical to us, but at this time we don't have any plans to run out and buy some big generating units.

We think we can continue to grow the wholesale business in a very attractive way over the next few years.

I do think long-term that there is a need to be able to control electron, durone electrons that doesn't necessarily mean earning

the ground, but it could be through a whole a variety of different ways and we will be exploring that as we go through the whole strategic planning process, but again thank you all for your time.

We think we had a pretty good quarter.

We look forward to talking to you in the future.

I'm going to turn the call back to Christine, if you want give any final instructions on replay for those who may have joined the call late.

Thank you sir.

I think we are all set, if you have any more questions.

If you want to give us a call back at NU any follow ups, we will be around and thank you for joining us today.