康涅狄格電力 (ES) 2006 Q2 法說會逐字稿

Welcome to the Northeast Utilities second quarter earnings conference call.

At this time all participants will be able to listen only until the question-and-answer session.

Today's conference is being recorded.

If you have any objections you may disconnect at this time.

Your host for today's call is Mr. Jeffrey Kotkin, Vice President of Investor Relations.

Mr. Kotkin, you may begin.

Thank you.

Good morning and thank you for joining us today.

My name is Jeff Kotkin, and I am NUs Vice President of Investor Relations.

Speaking to you this morning will be Chuck Shivery, NUs Chairman, President and Chief Executive Officer;

David McHale, our Senior Vice President and Chief Financial Officer;

Cheryl Grisé, NUs Executive Vice President and head of our distribution and regulated generation businesses; and Leo Olivier, NU Executive Vice President and head of our transmission operations.

Comments made during this earnings call may include statements concerning NUs expectations, plans, objectives, future financial performance and other statements that are not historical facts.

These statements are forward-looking statements within the meaning of the Private Litigation Reform Act of 1995.

In some cases, the listener can identify these forward-looking statements by words such as estimate, expect, anticipate, intend, plan, believe, forecast, should, could and similar expressions.

Forward-looking statements involve risks and uncertainties that may cause actual results or outcomes to differ materially from those included in the forward-looking statements.

Factors that may cause actual results to differ materially from those in the forward-looking statement include but are not limited to actions by state and federal regulatory bodies, competition and industry restructuring, changes in economic condition, changes in weather patterns, changes in laws, regulations or regulatory policy, expiration or initiation of significant energy supply contracts, changes in levels of capital expenditures, developments in legal or public policy doctrines, technological developments, volatility in electric and natural gas commodity markets, effectiveness of our risk management policies and procedures, changes in accounting standards and financial reporting regulations, fluctuations in the value of electricity positions, the methods, timing and results of the disposition of competitive businesses, actions of rating agencies, terrorist attacks on domestic energy facilities and other presently unknown or unforseen factors.

Other risk factors are detailed from time to time in our reports to the SEC.

We undertake no obligation to update the information contained in any forward-looking statements to reflect developments or circumstances occurring after the statement is made.

Now let me turn over the call to Chuck.

Good morning.

Thank you, Jeff, and thank you for joining us this morning.

Before moving into the financial section of this call, I want to spend a moment discussing the intense weather we've had over the past several weeks.

We set a number of new demand records in all three states and in New England.

However, along with the heat have come a number of intense lightening storms as well as some underground distribution cable faults this week in Stanford.

Our 5,000 downtown Stanford customers who lost service yesterday afternoon had it restored around 9:00 p.m. last night.

We appreciate the patience of those of you who are back in your offices this morning and listening to the call.

Turning back to our financial review, I'm very pleased to say that over the past three months we have made considerable progress in transforming ourselves into a Company fully focused on its regulated businesses.

As a result, the strategic initiatives we announced in 2005 are well along the path of implementation and the vision of a new NU that we described to you at EEI in November is fast becoming a reality.

Perhaps the most important step occurred July 24th when we announced an agreement to sell our competitive hydroelectric and coal fire generation to Energy Capital Partners for $1.34 billion.

We are very pleased with the transaction, which underscores the quality of the generation assets and the talent and professionalism of the people who run those units.

We look forward to a smooth transition and closing by the end of this year.

David will describe the impact of those sales on your financial position but we are certainly pleased with the amount of cash the sale will generate, which we will be able to deploy into our regulated companies.

The sale will improve our liquidity, strengthen our balance sheet, and allow us to deploy significant shareholder equity from our competitive business into building the energy delivery infrastructure needed in New England.

We also made significant progress in the quarter divesting other competitive businesses.

In May, we closed on the sale of Select Energy Services to Ameresco and in June we closed on the sale of our retail marketing business to Hess Corporation.

As a result, our competitive businesses are now essentially comprised of the generating units we have contracted to sell, a shrinking level of wholesale commitments in PJM and New York and electrical contracting firm based in Maine.

We are working to exit most of these areas by year end.

In our regulated businesses, the quarter was highlighted by continued progress on our major capital projects, which Lee and Cheryl will describe in more detail.

These projects continue to be on budget and on or ahead of schedule.

And we look forward to two of them entering commercial operation later this year.

One project that is several years from completion cleared a major milestone in the second quarter, when the New Hampshire legislature passed and Governor Lynn signed a bill that will allow us to install a scrubber at our Merrimack Station, our largest regulated generation station in New Hampshire.

We have also concluded a number of milestones concerning distribution rate matters.

On July 1, as a result of a settlement with all parties to PSN&H rate case, New Hampshire implemented a $24.5 million distribution temporary rate increase, which will help stabilize the S&Hs earnings until the full rate case is concluded and permanent rates are established.

Over the past week we have also clarified two important distribution rate issues concerning CL&P.

First, Connecticut regulators concluded on July 27th that as a result of a private letter ruling we received earlier this year from the Internal Revenue Service, it would be appropriate for CL&P to eliminate certain liabilities from its balance sheet in the third quarter of 2006 and record a $74 million after-tax gain.

Also today we informed Governor Ralph and the Connecticut DPUC that CL&P intents to forego filing for higher distribution rates until mid-2007.

We made this decision as part of an ongoing collaborative work with state leaders to balance returns to our shareholders with rising customer bills over the 2006-2007 time frame.

David and Cheryl will elaborate on these two items and on their impact on the Company.

Turning to your transmission business, as I'm sure most of you are aware, on July 20th FERC approved a transmission incentive pricing in response to the Energy Policy Act of 2005.

We are very encouraged by this new policy, which we believe appropriately captures the spirit of congressional intent.

The policy provides a menu of cash flow and earnings incentives that are available to incent the construction of much needed transmission infrastructure.

While not automatically granting these incentives for all investments, the FERC indicated that companies could specifically --could request specific incentives for individual projects.

Lee will discuss this issue in a little more detail later in the call.

Our transmission business earnings continue to run well ahead of last year, which we expected, given our increased level of investment and fully tracking FERC tariff.

Our distribution business earnings are ahead of last year on a net income basis but behind on an EPS basis due to our 2005 share issuance.

Our net Company expenses are running well below last year helped by higher investment income, the sale of a small telecommunications investment and shifts of certain calls among business segments.

As a result, you probably noticed in our news release that we have amended our earnings range for our regulated and parent operations this year.

Including the $74 million gain I noted earlier, we estimate those amounts -- these segments will earn between $1.57 per share and $1.70 per share in 2006.

Excluding that gain, our guidance would still be between $1.09 and $1.22 per share.

In addition to reflecting the gain, we have changed the components of our initial guidance.

We now expect to earn between $0.34 a share and $0.37 a share in our transmission business and we expect our parent to essentially break even.

At our distribution and regulated generation businesses we expect to earn between $1.23 and $1.33 per share with CL&Ps tax gain and between $0.75 and $0.85 per share without it.

David will expand on the reasons for these changes.

We have not yet established 2007 guidance, but expect to do so during our breakfast presentation at the EEI conference in November.

At that time we also expect to update for you our five-year capital expenditure forecast.

Now I will turn the call over to David McHale.

Thank you, Chuck.

Overall year-over-year consolidated earnings were up significantly from a loss of 27.7 million in 2005 to a gain of 22.2 million this year.

Clearly, this was driven in part by an improvement in the financial results of our competitive businesses which were -- which continue to wind down operation.

However, results of the regulated business and parent also showed healthy improvement posting earnings of 33.5 million or $0.22 per share versus 22 million or $0.17 per share last year.

The improvement in six month result is even more dramatic with consolidated earnings coming in at 12.1 million versus a loss of 144 -- excuse me, 145.4 million last year.

These result were also driven in large part by improvements of the competitive businesses as large losses last year continue to narrow.

In terms of our business segments, the transmission business earned 12.7 million in the second quarter of 2006 and 25.4 million in the first half of the year.

Compared with 10.3 million in the second quarter of '05, and 18.7 million in the first half of 2005.

Year-over-year increases are about 23 % for the second quarter and 36% for the year to date.

Those increases are consistent with a 31% compounded annual growth rate we projected for our transmission rate base last fall.

Since most of our new transmissions estimate is at CL&P that company is responsible for the bulk of our transmission earnings growth.

CL&P business segment earned 18.8 million through June 30, '06 a 54 % increase from the same period in 2005.

While our transmission earnings are not sales dependant our distribution earnings clearly are.

We continue to experience lower electric and natural gas sales through June as a result of mild weather earlier this year and customer reaction to higher fuel and purchase power costs.

At our distribution business, regulated retail electric sales were off 2.5 % in the second quarter and 3.0 % through the first six months compared with 2005.

Entering the year we had expected sales to actually increase by approximately 1 %.

It's worth noting that on a weather adjusted basis sales are down only 0.8 % through June so we are not seeing significant demand destruction.

Natural gas sales are down 11.5 % through June, 3.9 % on a weather adjusted basis.

Despite the sales trend earnings for the distribution and regulated generation segment increased to 20.8 million from $11.7 million last year.

Much of this improvement reflects results of PL&P and PS&H, some of which is explained by non-recurring events that I will touch on in a moment.

CL&Ps distribution business earned 6.4 million in the second quarter of '06 and 29.8 million in the first half of this year compared with earnings of 4.6 million in the second quarter of '05 and 24.0 million in the first half of '05.

The improved year to date performance was due primarily to the absence of a 4.4 million charge we recorded in the second quarter of 2005 related to street light billing refunds.

Higher distribution rate have been offset by lower sales and some higher operating cost, including storm expenses.

Earlier, Chuck described two items effecting CL&P.

The first related to a 74 million gain the Company will record in the third quarter of 2006, related to certain excess deferred income taxes and unamortized investment tax credits associated with the generation asset sales that CL&P sold between 1999 and 2002.

That reduction is related to an industry-wide issue related to generating plants that were sold by regulated utilities as a result of industry restructuring.

That issue was recently dispositioned by the Internal Revenue Service in a private letter ruling.

The Connecticut Department of Public Utility Control review the private letter ruling and determined last week that it is appropriate for CL&P to remove relevant reliabilities related to these items from its book.

CL&P will do this in the third quarter through a $74 million reduction in tax expense and thereby recognize a similar gain to net income.

The gain will not effect CL&Ps distribution earnings as calculated for regulatory purposes and therefore will not impact CL&Ps regulated distribution ROE.

Which on a trailing 12 month basis is now approximately 7.7 %.

Proforming end to CL&Ps operating earnings the 74 million gain should result in a net income ROE in the range of 15% to 16 % for the full year 2006.

The second item Chuck noted was our intention to postpone the distribution rate case that was originally planned to be filed this year.

CL&Ps distribution rates will remain unchanged except for the previously approved increase of $7 million that will take effect January 1at, '07.

As a result we do not expect CL&P to earn its authorized 9.85% return in 2007, and in fact we project that figure will be in the area of 7%.

However, we expect to file a rate case mid '07 for new rates in effect January 1, 2008.

We expect new revenues from that case to support a large improvement in CL&Ps 2008 distribution results.

CS&Hs distribution and regulated generation business earned 12.9 million in the second quarter of 2006 and 15.4 million in the first half of '06.

Compared with 6.6 million in the second quarter of 2005, and 13.5 million in the first half of '05.

This significant improvement in second quarter earnings is due to the timing of income tax expense recognition associated with the full recovery of the PSNHs part 3 stranded costs.

This second quarter benefit will turn around over the course of the year and be neutral to PSNHs earnings in the 2006.

Overall, PSNHs regulated distribution ROE was only about 6.9 % over the past 12 months, but we expect that figure to improve over the coming quarters due to the 24.5 million temporary distribution rate increase that took effect July 1st.

We also believe that additional revenue flowing from PSNHs permanent rate case request should support further financial improvement.

Western Massachusetts Electric Company's distribution business earned 1.6 million in the second quarter of "06, 5.8 million in the first half of '06 compared with 900,000 in the second quarter of 2005 and 4.9 million in the first half of '05.

The improved results are due primarily to the effect of a 3 million annualized rate increase that took effect January 1st.

Yankee Gas lost $100,000 in the second quarter of '06 and earned 11.7 million in the first half of this year compared with a loss of 400,000 in the second quarter of '05 and earnings of 14.5 million in the first half of 2005.

Lower Yankee year to date results are due primarily to the 11.56% reduction in sale this year.

Yankee's regulatory ROE over the past 12 months is now 6.8%.

Turning to our competitive businesses, we lost 14.3 million in the second quarter of '06 compared with a loss of 47.1 million in the same period '05 when we recorded significant wholesale mark to market charges.

On an operating business, the businesses, excuse me, on an operating basis, the businesses essentially broke even this quarter, but lost money on the mark to market changes in its remaining wholesale contract and recorded additional restructuring charges during the quarter related to the sale of its retail and services business.

In connection with the sale of Selects retail business, on June 1st we are making three payments totaling an estimated $44 million to Hess, aside from the payment of the remainder of the 44 million owed to Hess retail should have essentially no impact on our financial reporting going forward.

The merchant wholesale and generation business will continue to impact our quarter results at least through the end of the year, as will our significantly reduced level of service decisions.

Excluding mark to market impacts those businesses earn nearly 6 million in the second quarter of 2006.

That result is clearly better than the last year when we recorded very significant losses marking to market our wholesale power contracts.

In terms of earning guidance, as Chuck mentioned, for the full year 2006 we've increased our overall range, excluding the competitive businesses, to $1.57 to $1.70 per share from 1.09 to 1.22.

The specific changes are first, the addition of $0.48 per share related to the 74 million of CL&P tax benefits discussed earlier that we will record in the third quarter.

Second, a $0.02 increase in transmission guidance driven by additional rate base growth stemming from the success that we are experiencing in our business this year.

Third, a reduction in NU parent and other costs which will improve guidance to roughly break even from a loss of minus $0.12 to minus $0.09.

This improvement results from additional interest income on the parents excess cash some of which dates back to our December 2005 equity offering.

The sales of NUs ownership in Globex in the second quarter which produced 2 million of earnings and 6.7 million of cash and earnings from two small affiliates, an NU real estate company and our service company.

Lastly, we reduced guidance for our distribution and regulated generation segment by $0.11 to $0.14 to reflect a number of factors and assumptions that were used to develop guidance in October of last year.

With respect to those factors, on the negative side the lack of CL&P rate release at both -- excuse me, the lack of rate release at both CL&P and Yankee Gas, that factor accounted for roughly half of the reduction.

Also, lower electric and gas sales than expected, a higher share count, a higher effective tax rate at PSNH related to the higher asset sale proceeds from our competitive generation and some reallocation of costs that actually benefited NU parent are some of the key variables.

Benefiting earnings however were were cost management initiatives within the distribution companies and throughout the corporate organization.

The summer weather we are now experiencing should certainly help our '06 results but we also are aware that warm summer weather can put this -- put strain on our physical system we are now seeing and actually add expense during these hot days.

Looking forward to 2007, the lack of a CL&P rate case in Connecticut will clearly put pressure on CL&Ps earnings and return on equity levels but for NU overall we continue to see strong earnings growth consistent with the discussions we've had in the past.

Most analyst who follow the stock currently have 2007 earnings estimates in the $1.30 to $1.40 range.

Although we don't expect to provide specific 2007 guidance ourselves until the November EEI meeting, we can tell you that we feel very comfortable with these numbers.

The basis for that comfort, is that as we look to '07 we see several key earnings drivers.

First our investments in transmissions continue to grow rate base which in turn provide very meaningful net income growth.

This view is supported by the fact that we just increased '06 guidance for the transmission segment.

Another supporting factor is that we expect to grow transmission rate base from about 600 million at year-end '05 to just north of 1 billion by the end of this year.

Second, we will put into effect the $7 million rate increase for CL&P on January 1, '07, which is the last increase dating back to the Company's 2003 rate case.

We will also benefit from PSNH rate release and the Yankee Gas rate filing which we expect to become effective no later than July 1, '07.

That case will incorporate the Company's 108 million LNG facility into rate base and result in a significant increase in its earnings base.

We are also quite hopeful that we will put into rates -- new rates for Western Massachusetts Electric Company as well.

Third, the cash benefit related to the sale of our competitive generation will provide interest income for NU parent and offset its own interest and O&M expenses.

And lastly, there will be no share issuance in '07 unlike 2005's issuance which somewhat diluted NUs 2006 earnings per share growth.

Longer term, we continue to feel strongly that this Company can grow its earnings per share in the 8% to 10% range on average and our 2007 earnings will be a very significant step in achieving that grow.

In fact, we expect that year-over-year earnings growth for 2007 will be considerably higher than 8% to 10%.

We also feel this type of growth can support dividend increases above industry averages without compromising our dividend payout ratio.

I'd like to change the subject and discuss the implications of our pending sale of competitive generation.

As Chuck discussed, the sale for generation for 1.34 billion will have a very significant impact on our financial statement.

We expect to close on this sale in the fourth quarter of this year.

Upon closing, we expect to record an after tax gain of approximate $300 million or $1.95 per share.

Which will also add significantly to our level of common equity, which currently stands at about 2.35 billion.

Additionally, the sale of NGC will remove 320 million of 8.8 % long-term debt from our liability.

This combination will result in a significant strengthening of our balance sheet and along long with the divestiture of our competitive businesses will reduce our overall business risk profile, thereby providing NU with more financial flexibility going forward.

From a cash standpoint we expect to receive proceeds of approximately 1 billion, net of $320 million of NGC debt.

And project a combined federal and state tax liability of between 450 and 500 million, which we expect to pay in the first quarter of 2007.

We will use the balance of between 500 and $550 million primarily to fund our regulated capital expenditures and also reduce modest levels of short term debt we currently carry at the competitive businesses.

This amount of cash leaves us in an advantageous situation.

We have told you in the past that in order to continue funding our regulated investments, particularly transmissions, we anticipated the need for additional common equity offerings, the first as early as 2008.

We also indicated that there are three key factors driving our external financing requirement.

The first factor relates to the amount of net proceeds we realize from our divestiture activities.

The second relates to the size and pace of our capital expenditures plan.

The third factor is the degree of leverage or total debt we use to capitalize our business.

With respect to the first factor, you know from our past disclosures that we estimated net proceeds from the competitive business in the area of $200 million.

With the result of this recently announced transaction it's appropriate to say that we will exceed this amount.

However, I think at this point in time it's more meaningful to look forward at our remaining exposures to determine overall cash needs.

At the competitive businesses we still hold several positions, including our PJM book, a single New York contract and a number of supply contracts.

We continue to work toward divesting these contracts and estimate that on a net basis it will require less than 100 million in cash to exit these positions based on today's forward curve.

In terms of the second factor we have previously stated that our five-year capital program from 2006 to 2007 totals $4.3 billion.

Nearer term this year we will expect -- we expect to spend 900 million in capital and approximately 900 and 950 million in '07 and 2008 respectively.

With respect to the last factor we previously stated that we see a leverage on the utilities in the 55% area and somewhat higher if the 60% for the consolidated organizations.

Assuming no changes in our capital programs, leverage targets and of course operating cash flow our divestiture -- divestiture proceeds could negate the need for equity in 2008.

However, we continue to analyze the capital expenditure requirement of our region and our specific companies in the pace at which we bring projects on-line.

We may be able to accelerate some of our transmissions estimates we have described to you over the past year, which would increase the use of this cash in '07 and.2008, but also accelerate transmission earnings growth.

In addition, as we will discuss, we are analyzing our ability to capitalize on the FERCs recent NOPRA (ph) in order to increase cash flow to reinvest in our businesses.

We will take all these factors into account as we determine our specific future financing requirement.

We will update you on the five-year capital program, financing plans and provide you with our official segmented 2007 earnings guidance at our traditional EEI Finance Conference breakfast in November.

Turning to a few final items, our capital expenditures continue to be on target for a total of approximately $900 million by year end.

Through June 30, they total 420 million, including AFUDC compared with 344 million in 2005.

To help fund those expenditures, on June 7th CL&P issued 250 million of 30-year first mortgage bonds at a rate of 6.35%.

Our net cash flows of operations totaled 213 million in the first six months of 2006 compared with 278 million in the same period of 2005.

The lower level of cash flows was due primarily to a higher level of regulatory refunds at CL&P this year.

The level of CL&Ps customer refunds should decline significantly over the second half of the year as a result of a DPUC decision effective this week that reduces a credit on customer bills by nearly $0.01 per kilowatt hours.

On September 9th we will pay a common dividend of $0.18.75 a share, up more than 7% from our June 30 dividend rate.

Our board has [INAUDIBLE - can't discern] to increase the dividend for the sixth consecutive year underscores the confidence that we have in our business strategy.

Now, please let me turn the call over to Cheryl.

Thank you, David, and good morning everyone.

I'll start by picking up on Chuck's comments earlier about this summer's heat.

We are clearly seeing stronger electric sales as a result of the intense heat and humidity we've experienced over the last few weeks, but we've also seen regular intense lightening and wind storms across our service territory, which has certainly driven up our operating costs.

So, while revenues appear to be strong so far this quarter there will be some offset on the expense side when we report third quarter results.

Turning to the legislative front, we were satisfied with the law passed in the New Hampshire legislature earlier this year relating to the reduction of mercury emissions in our New Hampshire coal fired plant.

Such reduction will be accomplished through the installation of wet scrubber technology at the Merrimack Station, which in a typical year is responsible for almost 40% of PSNHs customer energy requirements.

We expect to file applications with environmental and economic regulators over the next two years and to begin construction of the scrubber by 2010.

Under the legislation, it must be operable by mid-2013.

Costs related to the scrubber will be recoverable through our energy service rate but we do not expect it to have much of an impact because we expect a reduction in our sulfur emissions by at least 80% to create a significant reduction in our need to purchase sulfur allowances.

Other legislation relating to a proposal for PSNH to build another wood fire generating unit in northern New Hampshire, which has suffered recently from paper industry plant closings, was not adopted this year.

In Connecticut, the legislature continues to hold energy summits to gather information concerning rising electricity commodity and capacity costs and to consider solutions to these issues.

We currently expect the legislature to consider taking up new energy legislation either in its regularly scheduled 2007 session or in a special session held later this year.

On the regulatory front, as David eluded, PSNH made some real progress over the past couple months.

Effective July 1st, PSNH implemented a a number of change to its retail rates.

Due to lower wholesale power prices PSNH cut its energy charge by about $0.01 per kilowatt hour and due to the completion of its part 3 stranded cost recovery, PSNH cut its stranded cost charge by about $0.02 per kilowatt hour as well.

As a result, PSNH overall rates declined by more than 15% on July 1st and are now among the lowest in New England.

These reductions were partially offset by a $24.5 million temporary increase in PSNHs delivery charges as a result of a rate settlement we reached with other parties to PSNHs rate case.

This temporary distribution increase will remain in effect until PSNHs permanent case is decided, probably sometime next year, unless a settlement is reached before then.

We believe that this increase should allow PSNHs distribution ROE to recover significantly from the 6.9% level to which it has fallen over the last 12 months.

In the permanent rate case in New Hampshire, we are seeking to raise rates by approximately $50 million, which is predicated upon a 10.5% ROE and is conclusive of the $24.5 million temporary increase that was approved at the end of the June.

Based on the commission's procedural schedule, if the case is fully litigated a decision should be issued around mid-year 2007 and retroactive to July 1, 2006 when the temporary rate increase took effect.

Also in New Hampshire, we continue to test the equipment we've installed at our northern wood power project at Schiller Station in Portsmouth.

We expect that the project to enter commercial operation in the fall despite the small ash fire that occurred on July 25th during the removal of coal ash that had built up over the course of the initial start-up testing of the unit.

As you may recall, especially those of you that joined us for a tour of Schiller last year, we do not expect this $75 million project to cause an increase in rates largely due to a new income stream that will be created by Schiller by the sale of renewable energy certificates, or RECs, from the project, primarily to energy marketers serving the Massachusetts market.

I am pleased to say that the market for these RECs remain strong and they are now priced around $50 per REC.

One REC is created by generating one megawatt-hour from a renewable source and we expect the northern wood project to generate approximately 350,000 megawatt-hours annually.

The other major project on the distribution side of the business is Yankee's 1.2 bcf liquefied natural gas storage facility in Waterbury, Connecticut.

That project remains on its $108 million budget and is approximately two thirds complete.

We expect to be filling it at this time next year in time for the 2007, 2008 heating season.

Turning to Western Massachusetts Electric Company, pursuant to a rate settlement approved by Massachusetts regulators in 2004 WEMECO was allowed to file for a rate increase in June 2006 to take effect on July 1, 2007.

WEMECO has delayed its rate filing in order to pursue settlement discussions with parties traditionally involved in WEMECO rate cases.

We are hopeful that these discussions will lead to a settlement satisfactory to the Company and that the DTE will approve the settlement with rates effective January 1, 2007. .

Turning to CL&Ps delivery rates, per last year's legislation our retail transmission adjustment clause continues to be reset every six months allowing us to recover on a timely basis CL&P's higher wholesale transmission cost.

On July 1st that charge rose slightly, by half a mil, which will allow CL&P to recover from customers an incremental $6 million over the next six months.

Now I like to turn the call over to Lee Olivier.

Thank you, Cheryl, and good morning.

NUs transmission and construction program remains on time and on budget and continues to create value for both New England's electric consumers and NU shareholders.

Reinfor -- reinforcement and expansion of New England's transmission system is clearly necessary and is a focus of both national and state regulators.

NUs reliability upgrade program, which addresses problems identified by ISA New England, is part of its regional planning process offers an excellent opportunity to grow shareholder returns.

Our $350 million 21 mile Bethel to Norwalk, 345 KB project is now about 90% complete.

We expect the entire project to be placed into service by November.

Completion of the Bethel to Norwalk on time and on budget is a major accomplishment and will not only enhance reliability in southwest Connecticut but it will also provide a significant reduction in congestion-related cost for all of Connecticut electric consumers.

We have begun site work on our 69 mile 345 KB Middletown to Norwalk transmission project.

We continue to estimate that our share of that project will cost approximately 1 billion $50 million.

This estimate is consistent with the bids that we have received so far.

During the remainder of 2006, we, expect to award all major equipment contracts and continue underground construction.

With total 2006 Middletown to Norwalk capital expenditures are approximately $145 million.

The projected in service date for this project is late in 2009.

We have revised the cost estimate for our 9-mile, 115 KB Glenbrook cables project located in the Norwalk - Stanford area.

Based upon our experience with Bethel to Norwalk and Middletown to Norwalk projects, including recently received bids associated with the the Middletown to Norwalk project, we now estimate that the Glenbrook project will cost $183 million as compared to previous conceptual estimates of $120 million.

We expect to begin construction in the fall and complete this project in 2008.

Also, I am pleased to report that we have signed a contract to replace the 35-year-old, 11 mile, 138 KB Long Island cables transmission line we jointly own with the Long Island Power Authority.

We expect the new cables to be installed in the winter of 2007 and 2008 and estimate that our share of the cost to be $72 million.

Consistent with what we estimate and have previously shared with you.

While we speak frequently about the larger projects, there are a myriad of other projects that we are currently working on.

One of those is our new $32 million sub-station in Killingly, Connecticut which will improve liability in northeast Connecticut.

That project should be complete by the end of this year.

Overall, our transmission capital expenditures totalled $194.7 million in the first half of 2006, compared with $86.3 million in the first half of 2005.

Total transmission capital expenditures for 2006 are projected to be $455 million.

Many of you have asked us this year if we expect our program to be effected by higher commodity prices and the limited number of manufacturers and contractors that are necessary to successfully construct the projects?

We are clearly seeing price increases.

Those increases have been factored in to our latest cost estimates.

Additionally, for most of our large projects we have, or about to contract for, the necessary equipment and construction services.

As Chuck mentioned earlier, we are very pleased that the FERC has issued a final incentive pricing policy and believe that it provides appropriate incentives to ensure the continued strengthening of the transmission grid.

This policy becomes effective on September 29th and provides a menu of incentives that transmission owners may seek on a case by case basis.

Those incentives include up to 100% construction work in progress and rate base, incentives -- return on equities for certain new construction, accelerated depreciation and 100% recovery of prudently incurred cost of abandoned facilities among other's.

We believe that these are the kinds of incentives that are necessary to attract capital needed to finance and construct large transmission projects.

While we continue to evaluate the policy, it is clear that we will now have the opportunity to seek additional incentives to support our transmission business strategy.

While we have not yet determined which incentive we will seek we have begun some of the initial modeling.

We estimate that increasing the amount of construction work in progress and rate base to 100% for our final three major southwest Connecticut projects and four projects associated with the southern New England transmission reinforcement initiative now under analysis for Massachusetts, Rhode Island and Connecticut, could add $125 million of cumulative cash flow from 2007 through 2010.

We also estimate that an additional 100 basis points of earnings on those same projects could add a total of $16 million of earnings during those same four years.

We have discussed previously, with you, Northeast Utilities has already sought various incentives that we believe are consistent with FERCs recently issued policy.

We, along with the other New England transmission owners, are already before FERC in a proceeding initiated in 2003, which seeks the establishment of a base return on equity as well as incentives related to new constructions and joining New England's regional transmission organization.

Now that FERC has issued its pricing policy we anticipate receipt of a final decision on the return in equity case later this year.

In conclusion, during 2006, we will complete our $350 million Bethel to Norwalk project, make significant progress on our $1 billion Middletown to Norwalk project and execute key contracts for our Glenbrook cables and Long Island replacement cables projects.

These accomplishments, combined with FERCs issuance of an incentive pricing policy, are all key signposts that both demonstrate our success in executing our strategy and position us well for future success and growth.

We will discuss this in more detail during our presentation of the EEI Financial Committee meeting in November.

I want to thank you all for your attention and I'd now like to turn the a call back to Jeff Kotkin.

And I'm going to turn the call back to Christine just to remind you how to enter your question.

Thank you, sir. (OPERATOR INSTRUCTIONS)

Our first question this morning is from Steve Rountos from Talon Capital.

Steve?

Good morning everyone.

I want to ask a question about one of the comments that David had made about the proceeds being more than you expected and that negating the need for -- for equity.

I guess I wanted to ask about that and then also whether you're also considering the impact of some of the transmission incentives on that decision for equity as well or is it strictly based on the proceed?

All right, Steve, this is David.

Let me take the last piece of that question.

My comments right now and what we're sort of formulating for planning purposes does not take into account the benefits that Lee Olivier described.

I think that's up -- upside for us, but clearly not something that we want to put in the bank quite yet.

Those are initiatives that we'll pursue later this year.

And when we have more to say -- if we have more to say about that in November, with respects to how it shapes cash flow going forward, certainly we will share that news with you.

But it's not built into the framework and the numbers today.

On the first point, relative to the proceeds, I think it is a very attractive transaction for us, both in terms of proceeds and its impact on this Company and its employees.

We have been careful in the past not to predict or describe precisely -- or estimate precisely what we thought the transaction would bring.

We did describe to you the amount of book value in the transaction.

But nonetheless, a transaction that is north of $900 per kw is certainly attractive and very meaningful in size.

And when we flow those benefits and you now we'll book that later this year and take the earning and cash in 2006 Q4, when we flow that into our overall planning we see that, as I suggested, all else being equal, if you will the level of leverage, the level of CapEx that we've shared in the past, it could -- it could negate a need for a 2008 equity offering.

But to be fair we are constantly, always looking at our capital expenditures and the size, the nature and the pace of those CapEx cou -- could produce specifically 2008 and 2007.

And that'll shape our very specific views that we'll -- we'll share in the future.

Great.

The next question I guess I had David, was the -- you said you were comfortable with the $1.30 to $1.40 range of EPS and then you noted that the CL&P -- the CL&P ROE on a trailing 12 month basis was 7.7%, I think.

And -- and when you file, I think Cheryl mentioned when you file for new rates, that won't be in effect until 1/1/08, so are we to assume that your -- your comfort with the guidance -- with the analyst estimates is based on continued underearning at CL&P?.

Yes.

In fact I think we went on to say that we expect CL&Ps cost of capital, or regulatory ROE next year to be in the 7% range.

So it will drift lower, we understand that.

We do have some rate relief coming in on January 1st of 2007.

But, with that said, and knowing there will not be new rates into effect in 2007 we have comfort with that overall $1.30 to $1.40 range.

And what's the CL&P rate base currently?

We're probably a little -- we're probably in the billion two range I would -- I would say, Steve.

For the equity portion or for the entire rate base?

For the entire rate base.

Okay.

Great thanks.

Our next question is from Ashar Khan.

Ashar?

Good morning.

Morning.

David, just -- just -- just trying to understand how should we look at -- you had mentioned the 200 million number previously that you expected would these proceeds -- what is the number based versus that 200 million expectation?

Ashar, you'll notice in my comments that I'm trying to reshape the conversation a little bit.

I'll answer that but, what I'm trying to suggest is that a better way to look at this number is to think about what we need to do going forward.

And what I mean by that is you know we spent a monies and significant monies on exiting the wholesale business and more recently on exiting the retail business, but we've largely funded that and we provided it -- we provided that funding through some debt, through some equity, through some cash flow, but in effect what's done is done.

And looking forward I think it's more meaningful to think about how much cash is coming in from the generating assets, which is this 500 to 550, and how much left do we need to spend exit the business?

And I've suggested that that's less than $100 million.

So that ought to, I think, posture you perhaps better to think through the cash flow going forward.

Now, if you want me to update the 200 million, we haven't gone through the precise science, but I think if you kind of work through the math it's probably twice that level.

Okay.

Thank you.

You're welcome.

Thank you.

Next question is from Anthony Crowdell from Jefferies.

Anthony?

Hi, I just had a question.

You guys gave the ROE and I guess the permitted ROE for CL&P.

I want to know if you can give that for the other distribution companies?

What you're earning and what's permitted for your last 12 months?

The authorized return for Yankee gas is 9.9%.

The authorized returns for Public Services of New Hampshire are -- are a little different, we have a specific generation return which is roughly 9.6% but there really is no specific authorized return for the distribution company.

And the same holds true for Western Massachusetts Electric.

There is no specific authorized return.

Could you state what you guys are earning the last 12 months or the first six months of the year?

Let me kind of just play back through -- through my comments.

We -- we mentioned I believe Yankee Gas is earning in the neighborhood of 6.9% for the last 12 months.

And for -- for Western Massachusetts for the last -- again the last 12 months they are a little north of 10 %.

New Hampshire?

New Hampshire in about -- about 7% range.

Okay.

That's combined generation and distribution?

That is the complete corporate entity.

The last question is what was the reason the Company decided not to request another rate case in Connecticut considering the amount you're underearning and the amount you're spending not request, when I think early January?

Anthony, this is Chuck.

I think as I said earlier, we look at a whole variety of factors around our rate case strategy.

And specifically with Connecticut, we made the decision as part of the ongoing collaborative work we've done with different state leaders and we try to balance the returns to our shareholders with the rising cost to our customers and do what we think is ultimately the best thing for the Company and that's kind of that plus a variety of other factors went into that decision.

Is there any concern on the regulators or the politicians from their point of view, that it seems that the rate -- the rate case is going to get pushed further an that there may be a greater amount of rate shock, where as before it looked like each year you guys were having rate cases and there'd be a steady incline.

What I'm concerned now is that you may have just one larger rate case that may cause a greater rate shock and cause more politicians to jump on the bandwagon.

I think clearly by -- by pushing this out to 2007 we -- there is the possibility that that rate increase could be higher.

But as I said a little bit earlier, I think we've discussed this with a number of the state leaders and I think it's a -- it's a collaborative approach that has allowed us to reach this decision.

Thank you.

No more questions.

At this time we don't have anymore calls or questions so thank you very much for joining us this morning.

If you have any further follow up just give me a call.

Thank you very much and have a good day.