康涅狄格電力 (ES) 2004 Q2 法說會逐字稿

Good afternoon.

And welcome to the Northwest Utilities Q3 Investor Relations Call.

At this time, all 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" then "one," to withdraw your question, you may press, "star" then "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.

Sir, you may begin.

Thank you, Jane.

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;

Bill Schivley, Interim President of NU Enterprises, which houses our competitive energy subsidiaries; and Dave Boguslawski, Vice President and Head of our Transmission Business.

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

Also joining us for the call are John Stack, our Vice President and Controller and John Roman, Controller of NU Enterprises.

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 conditions, 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.

Thank you, Jeff and good afternoon everyone.

As Jeff noted, Dave Boguslawski, Head of our Transmission Business is joining us for this conference call.

Because our transmission business is such a significant part of our investment and growth plan, not to mention a critical part of us fulfilling our public service obligation of maintaining reliable service, you will be hearing more from Dave about his group's progress, not only this afternoon, but also in the future.

Let's begin with our second quarter results.

NU earned $22.9 million or $0.18 a share in the second quarter of 2004, compared with $26.9 million or $0.21 a share in the second quarter of 2003.

We earned $90.3 million or $0.71 a share in the first six months of 2004, compared with $87.1 million or $0.69 per share in the first half of 2003.

Earnings in the most recent quarter included a pretax write-down of $3.75 million, that's $2.4 million after-tax of our investment in a fuel cell development company.

With this write-down, our investment in that company has been reduced to $3.75 million.

Absent that write-down, we earned $0.20 a share, which is around consensus.

I think we previewed the most significant factors in the quarter during our April conference call.

Earnings at our competitive businesses were $2.9 million, down significantly from both the first quarter of 2004 and the second quarter of 2003.

As we have discussed, this was largely due to a reduced revenue stream in our wholesale group which received higher payments on a per kilowatt hour basis on certain of its contracts in the first quarter of 2004, and much lower payments in the second quarter.

Overall, the first half of the year was quite solid for our competitive businesses, earning $21.7 million to date, up about 27% from the $17.1 million earned in the first half of 2003.

Bill Schivley will comment more extensively on the results of the first half and the projected financial results for those businesses.

As expected, our regulated business earnings rose between the second quarter of 2003 and the second quarter of 2004.

We earned $27.1 million in the second quarter of 2004, compared with $15.5 million in the second quarter of 2003.

The most significant change occurred at CL&P where earnings totaled $17.3 million in the second quarter of 2004, compared with only $4.7 million in the second quarter of 2003.

Cheryl Grise will go into more detail about the factors affecting CL&P results, but clearly, the rate relief we received earlier this year was an important factor.

For the year, we continue to expect to earn between $1.20 per share and $1.40 per share, which means we expect to earn between $0.49 per share and $0.69 per share during the second half of this year.

That range is for reported GAAP earnings, so it includes any investment adjustments in addition to any positive effects of the Connecticut Department of Public Utility Control's reconsideration of its decision last December on CL&P's four-year rate plan.

That draft decision issued last month, restored the recovery of about $35 million of cost to CL&P, primarily over the next four years.

If finalized, the most significant impact of that decision would be in 2004, as a result of the DPU's decision to allow us to recover a pension asset they earlier had ordered CL&P to write-off.

That draft decision, if finalized in the third quarter, would add approximately $15 million of pretax earnings to CL&P this year, prior to some offsets that Cheryl will describe more fully.

A final decision is expected on August 4.

The principal reason for maintaining the relatively wide earnings range is the effect of summer weather on electric sales.

Thus far, weather has been milder than average in New England.

I should also comment on the earnings pattern over the second half of the year.

Consensus shows earnings of $0.61 over the second half of the year, a figure with which we are comfortable, since it is near the middle of our $0.49 to $0.69 range.

However, analyst consensus show earnings much higher in the third quarter, than in the fourth.

Those quarterly estimates are probably based on last year's results.

In the third quarter of 2003, we earned $0.35 a share, prior to a $0.04 a share accounting change associated with RM Services.

That $0.35 a share of earnings included a number of significant adjustments to unbilled revenues that added $6.7 million or about $0.05 a share to regulated company's earnings.

The combination of losing that unbilled revenue benefit this year and milder summer weather so far, means that we expect third quarter results this year to be below those of 2003.

On the other hand, fourth quarter results were relatively weak last year, and we expect them to improve in 2004.

In 2003, excluding write-downs related to wholesale power contracts between CL&P and Select, earnings were $0.21 a share for the fourth quarter.

That figure included both the effects of mild autumn weather, and net after-tax write-offs of approximately $5 million associated with the CL&P rate case decision.

I want to stress that while we are comfortable with Street estimates for earnings in the second half of 2004, we believe that the distribution of those earnings should be more heavily weighted to the fourth quarter.

The past three months have been notable for the number of regulatory issues we put behind us.

They include the proposed settlement of the PSNH delivery rate case, and the FERC transmission rate case, final FERC or FERC approval of the settlement of the effects of standard market design on the old CL&P Select Energy contract and the settlement of ongoing litigation among the Long Island Power Authority, the Cross-Sound Cable Company and various entities in Connecticut, over power cables across Long Island Sound.

I will let Cheryl Grise and Dave Boguslawski speak to the specifics of those settlements, but I think that we can say that at this time we have more regulatory certainty than at any time in the past year or two.

As I have discussed with many of you, we have undertaken a comprehensive review of all of our business lines this year.

The review is identifying where our opportunities and risk lie over the next five years.

This review will reinforce our strategy of continuing to make needed investments in our regulated infrastructure, but it will also help us determine which projects we should pursue and at what pace.

We will report back to you on this process during our traditional breakfast meeting at the Edison Electric Institute Financial Conference in late October.

At that time, we also expect to report third quarter results and establish earnings guidance for 2005.

I have also mentioned previously that I felt that there are areas in our corporate and shared services functions where I believe we could be more effective.

We are currently undertaking a comprehensive review of these functions to ensure that they are effectively aligned with our strategic plan and are delivering services in the most effective manner possible.

We will update you on the progress of this evaluation in October.

Now let me turn the call over to John Forsgren, our Vice Chairman and Chief Financial Officer.

Thank you, Chuck.

Let me start by recapping some of the progress we made financially in the second quarter.

On May 11, NU announced an 8.3% increase in our quarterly dividend, so on August -- on September 30 we will pay a dividend of 16.25 cents per share to shareholders of record as of September 1.

That increase is consistent with our track record of increasing our common dividend at a rate higher than the industry as a whole.

To date this year, our capital expenditures have totaled about $312 million, $300 million of which was in our regulated infrastructure.

We now project that our capital expenditures will total about $675 million for the year or about $25 million below the 700 million which we projected in our April conference call.

Transition will account for about 210 million of that 675 with most of the other dollars to spent on our distribution systems.

Our regulated companies continue to issue new debt from the capital expansion program.

Last week PSNH closed on its first new debt issue since 1991 selling $50 million of 10-year first mortgage bonds at 5.25%, which we think is an attractive 79 point spread to treasuries at that time.

Earlier this year Yankee Gas sold $75 million of first mortgage bonds, also at attractive levels.

In the second quarter, Connecticut regulators approved the sale of $280 million of debt securities, an issuance which we expect to occur this fall.

A portion of those proceeds will be used to pay off some $59 million of 8.5% CL&P bonds that will be redeemed on August 10.

To help keep CL&P's capital structure in line during it's ongoing transmission and distribution build-out, NU has infused an additional $18 million of equity in the CL&P in the second quarter.

About a month ago, CL&P also renewed its $100 million accounts receivable line for three years.

We currently have $60 million drawn under that line.

Overall, our general corporate liquidity remains strong.

As of the beginning of this week, we had nothing borrowed on our $300 million regulated company credit line and $53 million of letter of credit accessed on $350 million parent and non-competitive -- competitive business credit line.

These lines all mature in November and we are looking at the appropriate sizing going forward as a result of the growing capital program and the additional liquidity which may be needed to meet Standard & Poor's test for energy marketing companies such as Select Energy.

You can see from the unaudited financial statements we sent out to you today that our balance sheet remains strong.

Debt as a percentage of total capitalization totaled 52% as of June 30, somewhat below our target cap level of 55%.

Aside from the PSNH debt issue there has been one significant change in our balance sheet since the end of June.

On July 8, CL&P paid approximately $83 million to its 2003 standard offer suppliers, including $40 million of that to our Select Energy to close out the standard market design dispute which Chuck referenced a moment ago on the call.

All $83 million came from the $124 million of restricted cash which CL&P had as of the end of June.

The remaining $42 million and another $31 million will be refunded to CL&P customers in a manner that is yet to be determined by Connecticut regulators.

There will be no earnings impact from this transaction beyond what we recorded in the fourth quarter of last year.

This quarter, we again included a preliminary cash flow statement with the earnings news release.

Most obvious change from 2003 is the net cash flows from operations have more than doubled in the first six months of 2004.

There have been a number of factors, which contribute to this, including the payment in March of last year of approximately $90 million of accrued taxes related to the sale of the Seabrook Nuclear Plant.

Let me make a few comments on some of our non-core investments.

On July 19,.

Neon Communications announced that it was merging with Globix Corporation of New York.

As part of that transaction, Neon shareholders will receive approximately 1.3 shares of Globix for each share of Neon.

NU currently holds 1.8 million shares of Neon, which will translate into about 4% of the newly combined company.

On June 30 of this year, RM services, which came to NU in 2000 as a result of the merger with Yankee Energy Systems and was later spun-off to management.

We sold those assets to an unaffiliated third party during the June quarter.

Yankee Energy had retained preferred stock in RM services after the spin-off and we wrote down that investment in the third quarter of last year as Chuck mentioned.

There was no material impact on our income statement from the transaction in the June 30 quarter.

Let me turn the call now over to Cheryl Grise.

Thank you, John and good afternoon.

Our regulated businesses had a reasonably strong first half of 2004, both from a financial standpoint and from a regulatory standpoint.

Second quarter regulated electric retail sales remained quite strong with residential sales up 6.1% and commercial sales up 6.5%.

Industrial sales were down about 0.7 % for the quarter.

On a year-to-date basis residential sales are up 3.5%, 5.25 % on a weather-adjusted basis.

Commercial sales are up 5.3%, 5.7% on a weather-adjusted basis and industrial sales are up a bit less than 1%.

PSNH has seen the strongest sales on a year-to-date basis, up more than 5% while CL&P and WMECO were up just over 3.3%.

On a weather-adjusted basis PSNH looks even better, up 6.8%.

We believe a number of factors have contributed to PSNH's growth, including faster economic recovery, the addition of 11,000 new customers from Connecticut Valley Electric Company at the beginning of the year and increased output in the paper industry.

CL&P, though, had the most dramatic improvement in the quarter earning $17.3 million in the three months ended June 30, 2004 compared with $4.7 million in the same period of 2003.

This increase was due in part to sales growth and our new procurement fee but more so to the distribution and transmission rate increases CL&P received at the beginning of 2004.

Also, second quarter 2003 results were somewhat depressed by the cost of repairing an electric cable beneath Long Island Sound and a higher effective tax rate.

Chuck mentioned earlier that the DPUC had issued a draft decision in its reconsideration of our 2003 rate case.

We expect a final decision as early as next week.

The draft decision if finalized would allow us to recover approximately $35 million of costs that were disallowed in the December 2003 rate case decision.

The $15 million of pretax income that Chuck noted earlier is prior to any sort of earnings sharing and prior to a reserve that we may need to take associated with street lighting billing as a result of that decision.

That reserve could amount to about half of the 15 million benefit.

While there is a positive impact on 2005 through 2007 from the draft decision we expect that benefit on earnings will be modest.

Yankee Gas earned $200,000 in the second quarter compared with a loss of $2.9 million in the second quarter of 2003.

You may recall that during our June -- during our April conference call, I noted that a change in rate designs had changed Yankee's seasonal earning pattern.

Higher fixed charges and lower variable charges have increased earnings in the shoulder period and lowered them during the heating season.

The improvement at Yankee in the second quarter resulted in part from that change and in part from lower tax expense.

Since January 1 of this year, Yankee Gas earnings were $12.1 million compared to $13 million in the same period of 2003.

Those numbers are well below the results Yankee should be posting and illustrate the reason Yankee filed for $26.5 million of rate relief on July 2.

The next milestone in the Yankee Gas rate case will be Labor Day week when intervener pre-file testimony is due and hearings commence.

We expect a decision in late 2004 and for new rates to take effect January 1, 2005.

PSNH earnings were down about $5 million in the second quarter of 2004 compared with the same period of 2003 and down about $4 million over the first half of 2004, again compared with 2003.

Lower PSNH earnings are resulting primarily from higher pension expense and lower unbilled revenues.

I was very pleased that we were able to reach a settlement on our rate case with the staff of the New Hampshire Public Utilities Commission, the Office of Consumer Advocate's, and the State's Alpine Ski areas.

If approved by the New Hampshire PUC, PSNH will raise delivery rates by $3.5 million on October 1 of this year and another $10 million on June 1, 2005.

There is no ROE specified in the settlement for our distribution system and no timetable for filing another rate case.

I should also remind you that this settlement does not affect the 11% authorized ROEs we currently have for our transmission system, subject to FERC approval, and for PSNH generation nor does it effect the 8% ROE PSNH earns on its stranded cost.

Hearings on the settlement are scheduled to begin Tuesday, August 3 and we hope to receive New Hampshire PUC approval before the scheduled October 1 implementation of the first rate increase.

In a separate filing, now before the New Hampshire PUC we have asked that PSNH energy rate rise to 5.94 cents a kilowatt hour effective August 1.

This is an energy rate adjustment that will have no impact on earnings.

Before leaving PSNH, let me note that we are beginning work on a two-year $75 million project to convert a 50-megawatt coal-burning unit at our Schiller Station in Portsmouth, New Hampshire to burn wood chips.

That project received both New Hampshire PUC and local zoning approval in the spring.

The project will provide New Hampshire with very significant environmental benefits, not to mention a $20 million shot in the arm for the state's wood industry.

Finally, Western Massachusetts Electric Company earned $3.6 million in the second quarter of 2004.

While second quarter earnings were up about $1 million from 2003, year-to-date earnings are down $7.1 million in 2004 from $8.7 million in 2003.

Year to-date results have been negatively impacted by higher interest and depreciation expenses along with lower pension income.

We continue to work on ways to improve WMECO.'s financial results including regulatory options.

With that, let me turn the call over to Dave Boguslawski, who we said before is the Head of our Transmission Group.

Dave.

Thanks, Cheryl.

I haven't addressed a large group of NU investors for about three years now, and appreciate the opportunity to describe the progress we continue to make, bringing new high voltage transmission lines into service within our service territory.

There were two significant settlements reached in June that I want to review for you.

The first was our settlement at FERC of our transmission rate case with State Utility Commissions in Connecticut, Massachusetts, New Hampshire and with the Office of Consumer Advocate in New Hampshire.

The key elements of the settlement were, first of all, lowering our return on equity -- our authorized return on equity to 11% from 11.75% retroactive to October 2003.

The second part of that settlement was acceptance of our proposed rate tariff that resets rates every single year based on the amount of transmission plant we have in service and the amount we expect to place in service over the following 12 months.

That change effectively allows us to avoid rate lag as we build important projects for the benefit of our customers within the region.

We hope that FERC will approve the settlement around the end of this quarter.

The 11% allowed return on equity is going to remain in effect until a new ROE is set for all New England transmission owners through the FERC review of our proposed New England original transmission organization.

Hearings on that RTO are scheduled to begin in December.

The other settlement that was reached in June was between the Cross-Sound Cable Company, the Long Island Power Authority and various Connecticut parties, including us.

Essentially, Connecticut dropped its objection to operation of the contentious Cross-Sound Cable in which Northeast Utilities and its subsidiaries have no investment.

In return for the Long Island Power Authority support for replacement of 30-year old electric cables that connect Norwalk Connecticut with Northport to Port Long Island.

We jointly own those cables with LIPA and expect the $100 million replacement project to be completed in about four years time.

The replacement cable is the smallest of four major proposed transmission projects that will further connect Norwalk Connecticut to the east, west, north and south.

These projects and other smaller initiatives we'll undertake with ISO New England's support are important to retain electric liability service within New England.

The second largest project we are undertaking is a new 345,000 volt line that's 20 miles long.

It's a $200 million project that will connect Norwal, Connecticut with , Connecticut to the north.

That project has been given final approval about a year ago by the Connecticut Siting Council.

Substation work has been ongoing but commencement of significant line work has been delayed until we work through several siting details concerning the exact location of the lines, the underground vaults and the other equipment.

We're also awaiting resolution of an appeal of the Siting Council decision by the city of Norwalk.

We had three days of hearing in the Britain Superior Court earlier this month on Norwalk's appeal, and we hope the appeal and other issues are going to be resolved by early fall.

The largest project underway is a 70-mile $600 million 345 kilovolt line from Middletown, Connecticut to Norwalk that we're proposing to build with United Illuminating.

Hearings continue on that project and we expect a decision around year-end.

The key issue with this project is the amount of the underground that we can build.

And we are in discussions with ISO New England, United Illuminating, the State and the various communities over how much of this project can be built underground without compromising reliability.

We are aware that analysts who are seeking to model NU's future earning stream are highly focused on the timetable for constructing these two 345 kilovolt lines.

And while these projects are important, they are far from the only projects we are working on.

To date this year, for example, we've brought about $70 million of new transmission projects into service, and as John noted earlier, we are currently forecasting $210 million of transmission capital expenditures in 2004.

Aside from the two major transmission lines in Norwalk, we are likely to spend more than $500 million of capital on transmission projects over the next five years.

ISO New England and NU have identified additional projects through New England's formal planning process.

And these projects are necessary to meet the reliability needs of the region and to create a more competitive electric market.

For example, we have begun working with surrounding towns to build two separate nine-mile 115,000 volt underground lines west from Norwalk to serve the growing needs of the Stanford area.

Thank you for your time and now let me turn the call over to Bill Schivley.

Thank you Dave.

Let me provide you with a brief update on NU's competitive business.

NU's competitive businesses earned 2.9 million in the second quarter of 2004.

This was well below earnings in the first quarter of 2004 and also below the second quarter of 2003.

But it was no surprise.

As we indicated in our April conference call, we projected such reduction in earnings due to the pricing built into some of our larger wholesale contracts, which had larger margins in the first quarter and smaller margins in the second quarter.

We expect that our competitive business earnings will be more evenly distributed between the third and fourth quarter than they were between the first and second quarter.

Our wholesale and retail merchant energy business has earned 23.6 million to-date, compared with a forecast of 24 million to 31 million for the year.

At this time, we expect the merchant businesses to earn near the top end of that range.

At the beginning of the month we began serving new contracts with various NSTAR subsidiaries that will provide us with more than 225 million of revenues over the next 12 months, and currently we have about 80% of the gross margin we estimate we will need to meet our targeted earnings for wholesale electric and gas and more than 75 % of the retail margin required.

The other side of our competitive business, the services group did not have a good first half of the year, losing about 1.6 million, compared with profits of 1.8 million in the first half of 2003.

At this time, we do not expect to do any better than the low end of our previously stated 2004 earnings range of our services business of between 4 and 7 million.

The shortfall is due to a number of items including a 1.8 million after-tax loss on a major construction contract in the second quarter and the continuing difficulties with the federal government's reauthorization of its energy savings performance contracting program.

As you may know, this authorization is tied up with the Federal Energy bill, which is installed in congress.

Turning back to the merchant energy business and looking beyond 2004, we have won some wholesale contracts for 2005, including the NSTAR contract I noted earlier, and some significant load also in New Jersey and Maryland.

For 2005, the key bidding period for the wholesale marketing group as it was last year, will be this fall, when a number of opportunities arise, including the CL&P's transitional standard offer contract.

Select Energy currently serves nearly 40% of CL&P's needs in 2004 and expects to receive about $0.5 billion in revenue from this one contract this year.

Our wholesale business segment also includes about 1440 megawatts of generation and there were a number of positive developments involving that generation over the past few months that I'd like to report to you.

First of all, in June, the FERC approved a four-year license extension for our Housatonic hydro units in Connecticut.

That license covers four conventional stations and one pump hydro storage, which together account for 115 megawatts of capacity.

Secondly, at the end of May, the 270 megawatt Northfield Number One unit returned to service from a major overhaul that include installation of new equipment that improved the efficiency of the pump storage unit in both the pumping and generating modes.

And lastly by the end of September we will have completed the $21 million overhaul and upgrade of the Cabot Station in Massachusetts, our largest conventional hydrofacility.

Thank you very much for your time and let me return the call now to Jeff

And at this time, I will return the call back to Jane and we can take the questions from you.

Jane?

Our first question comes from Asher Khan.

You may ask your question.

Good afternoon.

If I can just review a couple of things, Chuck, you mentioned that in your forecast for the remaining six months, that it would include, if I'm right now, this 15 million pretax number which might get adjusted by the 7 million reserve.

So, net would be 8 million pretax, if the draft proposal on the rehearing on the Connecticut decision is granted by the commission at the end of the third quarter.

Will all of that be booked in the third quarter or we'll see it some in the third or fourth?

How will that play out?

We would expect a majority of that to be booked in the third quarter.

OK.

So it is -- it would be something like 8 million on a pretax basis net?

Using the assumptions that you use, yes, 15 million less just the one item that Cheryl mentioned, yes.

But it's really -- it's a draft decision yet and we haven't received the final yet, so it will depend on what the actual results are coming from the final decision.

And Chuck, I guess we've been hearing a little bit on the retail side of the business margins going down by GXP, WPS earlier and I know you guys were -- the retail business hadn't contributed much, it's just about to breakeven and I guess you had some positive news this quarter.

Could you just give your own inclination as to where the retail business is going and are you also seeing reduced margins and I know you guys were thinking whether it fits in your overall business or not?

What your views are in terms of conditions going forward?

Well, let me start, Asher and then I'll ask Bill Schivley to comment in a little more detail.

As to some of the latter questions that you asked, we think the retail business clearly fits into our merchant energy strategy.

We operate in, essentially, the three power pools of PGM, New York and New England and in all of those power pools there are opportunities and potentially growing opportunities for that retail business to continue to expand.

So we think it will be a part of the business going forward.

The second thing is that our retail business actually has seen, on a change basis certainly, a fairly significant improvement.

As you remember it lost a significant amount of dollars in 2002, increased that to or decreased that to a relatively minor loss in 2003, has been profitable in both the first and second quarter of 2004.

Some of that was due to the fact that we had some contracts that had pretty lousy margins on them and in fact we've seen a margin improvement from that perspective.

But let me ask Bill to comment specifically around how he sees that business operating.

Thank you, Chuck.

As Chuck mentioned, the business really has started moving around.

In fact, I didn't mentioned it earlier, but last year at first half of last year, 2003, we had a $3.9 million loss in the retail business.

This year we're 2.6 million ahead so that's about a $6.5 million swing.

An as Chuck mentioned, I think everybody in this business has probably had their turn with some contracts with less than desirable margins.

Fortunately for us, we're going in the right direction.

Our bad contracts, or ones that had lesser margins, are behind us.

And so we've been very happy with the margins we're receiving and they've been consistent and we believe we can continue to increase them especially as more of the market opens and we can get some of the smaller customers I think where a lot of the higher margins maybe.

Could you just elaborate on what those margins are on a sense per megawatt hour basis, what kind of margins are you getting?

I would say that we would average, if you wanted numbers, ballpark range, in that $2, $2.20 range per megawatt hour.

OK.

I appreciate it.

You're welcome.

Thank you.

Jane, I don't see any more questions in queue.

Maybe you can remind the callers of how they can ask questions, if they want.

But we do have one question, Zack Schreiber.

Hi, guys.

It's Zack Schreiber from the Ducane.

Can you hear me?

Yes.

Just a question on the energy rate increase at PSNH.

Can you sort of refresh my memory as to how the whole generation Fuel Clause structure works up in New Hampshire?

I mean, I recall you never sold a generation up there, they kind of halted deregulation.

Are you still on a Fuel Clause there?

Is there any risk or is it just a relatively perfunctory proceeding and what leads the energy price increases, is it just the underlying fuel cost?

Yes, to all of the above essentially the -- this is really a run of the mill Fuel Clause, the type of proceeding, there is no risk to our shareholders associated with that and you're absolutely right it's just the underlying cost of the energy that's going to cause that increase.

And what is that worth dollars a year, just to that increase?

Well, we don't get -- we don't get a pickup on...

I think, it's a direct...

OK.

And that's based on actual deferral that you have already incurred, to that phase on what your projected increase is?

That's what we project

OK.

Great.

And then on this Yankee tax issue, was there some sort of tax issue, at Yankee and is it ongoing or is it not ongoing, what's your effective tax rate for the full year?

I'm going to turn that over to our Controller.

It was primarily a one-time adjustment due also to the rate making in the state of Connecticut, which has more volatility in the effective tax rate and this was a positive adjustment to the taxes as a result of that.

And how big was it?

It was about $1 million

$3 million on a pretax basis.

OK.

Pretax is after tax adjustment?

Yes.

OK.

And then where are we on the whole ConEd lawsuit?

Actually guys -- I'm sorry to mention it, it's just -- we have to...

Well, thank you Zack.

We though we'd leave that for somebody to ask.

Really not significantly further along than perhaps most of the listeners already know.

The judge issued a ruling, as you know, that at least at his ruling said that the owners of NU's shares on March 5th of 2001 should be entitled to receive any proceeds, should we get some from the judgment.

And as you know NU has always thought that any value from that judgment should really run with the shares and be with the current shareholders.

The judge did, however, acknowledge that this was an issue that had not previously been decided.

And stated his belief that it should be reviewed by a higher court, before the case moves forward.

Both ourselves and ConEd have appealed to the Second Circuit Court of appeals for this review.

We really don't know when the Second Circuit will decide if they want to take the case and of course if they didn't decide to take it they have to lay out a procedure or schedule from that point.

So it's difficult to give you any sense of the exact timing.

We continue to believe that ConEd breached the merger agreement and should pay damages and we really believe that ultimately, regardless of the ultimate outcome of this issue, the case will continue to go forward.

The question really is at issue is to which group of shareholders would be entitled to receive any proceeds.

And is there some sort of statute of limitations as to -- or deadline as to when Second Circuit needs to decide whether or not they're going to take that appeal?

No, I don't believe there's any requirement for them to decide in any specific timeframe.

And did the District Court judge, I mean, if I recall to your point, the District Court judge said that this is kind of uncharted waters so as soon as he made a decision he said you know, kind of like, appeal me to make sure that I'm right here.

He actually certified this particular issue for appeal.

Normally, you would end up having a decision, then appeal the whole decision.

But I think he appreciated that this was such a critical aspect of this ongoing litigation that he certified this one particular issue for appeal, and in fact, suggested that it would in fact move the case along if the Appellate Court looked at it and made a decision.

And in doing that, did he certify to one court in particular, to the Second Circuit?

I think so.

OK.

And then just -- on this really big transmission line, this 600 million?

Yes, the Middletown to Norwalk line?

Yes, sir.

I think you mentioned that you wanted to start, so that would be done by the fall of '04?

No, I think - on one of the wrong lines.

Let me, Middletown to Norwalk line is right now undergoing Siting Council reviews so they are just going through the hearing process.

And that involves all the different stakeholders having an opportunity to voice their opinions on that line and how they feel about.

That process will go on essentially through the rest of this year and then we'll get ultimately a Siting Council decision.

And then, clearly there is the opportunity for judicial appeals subsequent to that.

But let me ask David Boguslawski, if there's anything he would like to add to that?

No.

I think that's it.

OK.

That's it, Zack.

And the last question just is -- assuming that we get through the appeals on the first one, does that mean that we could have a truncated appeal process on the second one?

Because I imagine a lot of the same sort of legal arguments on each side are going to be raised in the first one, that would be in the second one and we expect the litigation period after the Siting Council directly approves it to be truncated as a result?

Or everyone is going to drag this out no matter what and we don't get the benefit of shorter period for the second one?

I think it would be very difficult to speculate on a series of questions.

Number one even how the Siting Council will decide, whether there even would be an appeal and under what grounds if there was an appeal, the appeal would be lodged.

So it's virtually impossible to speculate on the timing of that.

OK.

Guys thanks much for the transparency.

OK.

Thanks Zack.

Next call is from Morrie May (ph), from Power Insight.

Good evening, everybody.

Hi, Morrie.

Got a question for Bill Schivley, actually.

In the wholesale marketing area in your three power pool footprints, there are a couple of small opportunities opening up in the next couple of years like in the District of Columbia and in Delaware but what about the future in two big states, Pennsylvania and New York?

During restructuring a lot of the companies got PPAs back from the power points that they sold but these roll off at some point and there must be some big opportunities looming in the next several years there, is that correct?

That is correct.

And you're absolutely right.

There is -- they are in the future.

There will be some very, very large opportunities as you correctly asked.

Many of the contracts in New York, when the assets were sold, a long-term standard offer contract went with them and the same is true in Pennsylvania.

To the best of our knowledge, some of the Pennsylvania utilities will begin to open around 2008, 2009, in that range.

OK.

The biggest opportunity, Morrie, may be as PGM expands to the west because you will be doubling the size of the PGM market from about 60,000 megawatt peek up to about 130,000 megawatt peek.

And you will stay active in the growing PGM?

Yes, very much so.

OK.

But nothing as far as (inaudible) is open up in those two big states really into Pennsylvanian in '08 or '09, is that correct?

That's correct

OK.

Thank you.

At this time, we have no more questions.

Maybe, Jane, you can remind people how to key-in questions, if they want.

And we do have another question, David Grumhaus from Copia Capital.

Good afternoon.

Hi, David.

A couple of questions for you.

The plant that you're putting in New Hampshire, the wood chip plant, you mentioned a $75 million investment.

How do you recover on that or was that already recovered for in the rate case?

That is not recover for in the rate case.

We will go back in and recover for that once that plant is complete.

OK.

Great.

On the Bethel line, if, you had the hearing, I know earlier this month, assuming you get a decision in the fall that's positive, will you start, can you then be able to start right away in terms of, I know you have been doing some of the preliminary work, but in terms of putting the investment in and moving forward?

Yes.

I'll let Dave -- I think the answer to that is yes, but let me ask Dave to give you some more specifics on it.

Yes, I mean that the key is of course to make sure we have got the scope button down clearly so when we release contracts we can go forward and we are working on that, and after you receive your sort of macro permit you go through a series of very detailed design efforts and review in detail by Siting Council and other environmental agencies and we are working on those and have filed all of those and so we are just awaiting that and then we're ready to go hopefully in the fall.

How will that $200 million of investment be split up?

Will the majority be next year or the following year?

It would be next year is '05; clearly the bulk of the spending would be '05.

OK.

And then under the FERC settlement that you had, you talked about rate tariffs being reset every 12 months then you also mentioned something about a forward look as well.

Can you explain how that works?

Sure.

We have a formula rate that basically looks to our revenue requirements as the numerator and the peak sales historically as our denominator and we bill on a peak usage basis.

The revenue requirements in the numerator, includes a forecast of the plant in service at the beginning and end of the rate year.

We then, after the rate year is over, we do a true up so that we actually recover our revenue requirements including the allowed return on equity.

I guess the question will you be forward recovering?

In other words if you're going to be spending a $100 million in the forward year will you cover that upfront or cover that at the end of the 12 month lag?

You are recovering a beginning and end of year plant in service for the rate year, so in essence you are -- you should be perfectly timing.

If you're forecasted perfectly you're perfectly timing your recovery, and just forward, no backward.

That's helpful.

Thanks for the time.

Thank you, David.

Next question is from Zack Schreiber.

I think my question was partially answered just in terms of the transmission investment, if you perfectly forecast and you perfectly recover, it so effectively that mean that you get a sort of a quick type add or as you sort of, invest the capital, is that what you're saying?

Well, you recover AFTDC on equipment until it goes in service.

I got it.

And then you would recover for the months that it's in rate base in the rate year.

What's the AFTDC rate, I want you predetermined, as AFTDC is litigated.

No, the AFTDC is a formula, it looks to short-term debt first and then the total cost of capital including the allowed ROE.

Which is 11?

Currently.

Perfect.

Thanks very much, guys.

If there anybody has any more questions, if you could enter them now or enter your number on your phone.

Jane, do you want to instruct focus on how to ask any more questions.

Yes, sir.

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

One moment.

OK.

Jane, it doesn't look like we have any more questions, so we want to thank you all very much for joining us here today.

If you have any follow-up questions please give us a call either today or tomorrow.

And we will talk to you, if not before in October at the EEI.

Thanks again for joining us this afternoon.

CONFERENCE CALL CONCLUDED