康涅狄格電力 (ES) 2006 Q4 法說會逐字稿

Welcome to the Northeast Utilities First Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS.] Your host for today's call is Mr. Jeff Kotkin, Vice President of Investor Relations.

Mr. Kotkin, you may begin.

Thank you.

Good afternoon, and thank you for joining us.

I'm Jeff Kotkin, NU's vice president for Investor Relations.

Speaking today for us will be Chuck Shivery, NU's Chairman, President, and Chief Executive Officer;

David McHale, NU's Senior Vice President and Chief Financial Officer;

Cheryl Grise, NU Executive Vice President and Lee Olivier, NU Executive Vice President who now oversees all of our regulated businesses.

Also, in the room today is Shirley Payne [ph], our vice president and controller.

Comments made this afternoon include statements concerning NU's 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, you 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 different materially from those included in the forward-looking statements.

Factors that may cause actual results to differ materially from those, including the forward-looking statements, include but are not limited to, actions by state and federal regulatory bodies, competition in industry restructuring, changes in economic conditions, changes in weather patterns, changes in laws, regulations or regulatory policy, changes in levels and timing of capital expenditures, development in legal or public policy doctrines, technological development, changes in accounting standards and financial reporting regulations, fluctuations in the value of our remaining electricity positions, actions of rating agencies, and other presently unknown or unperceived 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.

I'll now turn over the call to Chuck.

Thank you, Jeff.

And thank you for joining us late on this first day back from a long weekend.

Before providing you with a review of 2006, and a preview of 2007, I would like to update you on the leadership changes announced at NU over the past few months.

The most visible change involves Cheryl Grise's decision to retire following the second quarter of this year after 27 years at NU.

We owe Cheryl a great deal for the leadership and sound judgment she has provided to almost every part of the Company, sometimes in very trying circumstances.

Later, in this call, Cheryl will review our distribution and regulating generation performance in 2006.

As a result of Cheryl's pending retirement, Lee Olivier is now responsible for all regulated operated areas, transmissions distribution and regulated generation within NU.

Later, Lee will discuss 2006 transmission results.

In addition, as a result of the progress we've made in the divestiture of our competitive businesses, [Larry DiSimone], who was president of those businesses, retired from NU at the end of 2006.

Larry was instrumental in helping the competitive businesses achieve their 2006 results and David will provide you with more detail on those results later in this call.

Finally, we are pleased that Shirley Payne recently joined us from [Tico], as our new corporate controller and chief accounting officer, filling a position that had been vacant since mid 2006.

Shirley is here with us today for this call.

2006 was a year of significant accomplishments for Northeast Utilities -- one that makes us very optimistic about the future of our Company.

We posted strong financial results, due to sound operations, the successful sale of our competitive generation assets and the one-time benefit of an IRS private letter ruling.

We continue to execute the strategic plan that we introduced to you in November of 2005.

Less than a year after we had told you we would exit our generation and retail marketing businesses, we closed on the sales of those businesses on terms that helped lower the risk profile of the Company while, at the same time, providing us with significant proceeds to invest in our regulated businesses.

Although we are responsible for a few remaining wholesale contracts, we have essentially transformed NU into a Company focused on regulated infrastructure.

More importantly than what we sold in 2006, is what we built.

In October, our Bethel to Norwalk transmission project was completed two months ahead of schedule and about $10 million below budget.

It has been operating well since that time.

Over the past eight months, we have also begun construction on three additional major transmission projects in southwest Connecticut.

These projects will provide reliability benefits to customers across New England, particularly, here, in Connecticut.

We also completed and placed in commercial operation our new 50-megawatt wood-fired base load plant in New Hampshire and have nearly completed our liquefied natural gas storage facility in Waterbury, Connecticut.

These projects will help the region's energy reliability and most of the added benefit of saving customers money.

As these projects demonstrate, we seek to provide leadership in developing energy solutions for New England, as a region, and particularly, for our 3.1 million retail customers, as we invest on their behalf approximately $5 billion in our regions infrastructure over the next five years.

We are working with public policymakers in Connecticut, New Hampshire, Massachusetts and Washington, D.C. to develop solutions that improve reliability, stabilize costs, reduce air emissions and promote fuel diversity and energy efficiency across our region.

Solving the region's energy needs will require a significant infusion of capital, a need that has been magnified by the recent run-up in energy crisis.

Our commitment to New England's infrastructure will grow by an even greater rate in 2007 than it did in 2006.

We project regulated capital expenditures of approximately $1.2 billion this year, compared with $925 million in 2006 and $793 million in 2005.

About $700 million of those 2007 dollars will be spent on our transmission system, particularly, in southwest Connecticut, as we work to alleviate one of the nation's most electrically-congested areas.

Our organic growth story is very robust because we are building infrastructure knee-deep to meet the reliability needs of our customers.

As we look beyond the five-year capital plan we have shared with you, we see additional investment requirements.

Some of those specifics, such as the additional east/west transmission interfaces and a new [scrubbers] at Public Service of New Hampshire's largest plant have been discussed.

Others are much earlier in the developmental process.

2006 was a year of significant achievement but it is now behind us.

We are now nearly two months into 2007 and we are very focused on executing this year's operating plans.

For transmission, we must achieve significant progress on both the construction program I noted earlier and on becoming an industry leader in operating our system consistent with new and tougher federal standards.

Our distribution businesses must continue to upgrade their infrastructure and in addition, we must secure rate relief needed to fund those reliability initiatives and improve our rates of return.

Both our reliability upgrades and rate filings are well under way.

In December, Western Mass Electric secured approval of a rate case settlement that we expect will allow us to maintain reasonable ROEs of 9% to 10% in both 2007 and 2008.

At PSNH, we are nine months into a distribution rate case we expect to conclude in the spring.

In Connecticut, we have two general rate cases to complete this year, cases that we need to pursue successfully to allow Yankee Gas and CL&P to begin earning fair returns on their distribution investments.

We are also having important discussions with Connecticut and New Hampshire legislators.

In Connecticut, justifiably concerned over recent increases in the cost of electricity, and the dependence the state has on electricity imports, both the governor and the legislative leadership have identified energy as one of their top priorities for the 2007 legislative session, which began 1.5 months ago and ends the first week in June.

We are working closely with legislative leadership to identify opportunities to help customers to use energy more effectively and provide long-term benefits to the homeowners and businesses in the state.

In New Hampshire, due to the 2006 elections, we've had a complete change in legislative leadership.

We have not yet had hearings on the two bills of most interest to us.

One bill would establish a renewable portfolio standard in New Hampshire and the other would enable Public Services of New Hampshire to make filings with the New Hampshire Public Utilities Commission for approval to build additional regulated generation, particularly, generation using a renewable fuel source.

We will update you on these legislative activities as we move through the year.

We believe that, in 2006, we were able to establish still better working relationships with public policymakers in our region and in Washington, and those relationships and strong execution of our operating plans will allow us to follow up a successful 2006 with additional solid accomplishments for our customers and our investors in 2007.

Now, let me turn over the call to David.

Thank you, Chuck. 2006 was, clearly, a strong year for NU, in terms of share price performance, but we also turned in a very good year, in terms of bottom-line net income, improvement in our balance sheet and credit quality and on top of that, we continued our very strong commitment to dividend growth.

This performance not only provided benefits to our investors, but we believe it will continue to benefit customers who are being served by an investment grade company that both -- has both the financial capacity to build needed infrastructure and an ability to fund these investments at a competitive cost of capital.

We believe we are positioned for another quite successful year in '07, due to a number of important catalysts, which should drive net income increases across all of our businesses.

Before I expand on 2007, however, I'd like to take a moment and recap 2006.

On a consolidated basis, we are at $470.6 million or $3.06 per share.

As we have signaled through the course of the year, earnings were, in part, driven by a number of non-recurring benefits.

One was a $314 million fourth quarter gain from the sale of our competitive generation.

Another was the $74 million third quarter reduction in tax expense, related to an IRS private letter ruling for the Connecticut Land Power Company.

Aside from those non-recurring items, and the impact of the remaining competitive businesses, we earned $1.16 a share in 2006, up from $1.10 per share for our regulated and parent segments in 2005 and right in the heart of $1.09 to $1.22 public guidance.

With that as a very high-level consolidated summary, let me drill down on our segment results.

First, our transmission business EPS results improved year over year by more than 25%, earning $59.8 million or $0.39 per share in '06, compared with $41.1 million or $0.31 per share in '05.

Those results are actually above our $0.34 to $0.37 per share guidance, driven, in large part, by the increasing success of our underlying projects.

In the fourth quarter, alone, the transmission business earned $16.2 million or $0.10 per share, compared with $10.6 million or $0.08 in '05.

This reflects the benefits of a larger rate base, less a $3 million one-time charge related to FERC October 31 New England Transmission ROE decision.

We will discuss that decision further in a moment.

The primary growth driver in 2006, as it will be in 2007 and beyond was an increased level of investment flowing through our FERC approved wholesale transmission rates.

We grew rate base by nearly 85% from $600 million at the end of 2005 to an estimated $1.1 billion at year-end '06.

Now, turning to our distribution and regulated generation businesses, they earned $197.5 million in 2006, $123.5 million or $0.80 per share, excluding the benefits of CL&P's private letter ruling.

In the fourth quarter of '06, those businesses earned $47.1 million or $0.31 per share, compared with $38.5 million or $0.28 per share in the fourth quarter of '05.

The yearly results of $0.80 per share fell square in the middle of our $0.75 to $0.85 per share public guidance, although admittedly, with the help of a $7.7 million or $0.05 per share non-recurring item at CL&P.

Affecting all of our regulated companies in 2006 were lower electric sales caused by weather and customer reaction to higher energy prices.

Overall, retail electric sales were down 4% in '06, compared with 2005.

On a weather-adjusted basis, they fell 1.6%.

Those declines were spread across all customer classes with residential sales off 5.6% -- 1.5% on a weather-adjusted basis.

Commercial sales down 2.3% -- .8% weather-adjusted and industrial sales were off 4.5% or 3.8% weather-adjusted.

PSNH had a significant rate reduction mid year, saw the least decline in retail sales, down 1.3%, but actually up .5% on a weather-adjusted basis.

CL&P's distribution business earned $147.6 million in '06, $73.6 million, excluding the effect of the private letter ruling, compared with $60 million in 2005.

In the fourth quarter of '06, CL&P's distribution business earned $33.4 million, compared with $19.1 million in the same quarter of '05.

A couple of major factors contributed to that improvement.

In the fourth quarter of 2005, CL&P recorded after-tax termination employee benefit retirement charges of $8.5 million, as a result of organizational restructuring activity.

In the fourth quarter of '06, CL&P recorded an after-tax gain of $7.7 million, related to the sale of Northeast Generation Company.

Although that item is in CL&P's net income, as the news release noted, that gain is eliminated in the system consolidation of NU net income.

In fact, the $7.7 million elimination accounts for almost the entire NU parent and other affiliate loss of $8.4 million, showing the press release.

Aside from those impacts, CL&P benefited from a January '06 distribution rate increase of nearly $9 million -- $12 million but was hurt by higher operating costs and lower sales.

For the full year, CL&P's regulatory return was 7.5%, versus the current allowed of 9.85%.

PSNH distribution in regulated generation business earned $27 million in '06, compared with $33.9 million in 2005.

The largest cause of that decline was PSNH's higher effective tax rate.

New Hampshire's unitary state income tax is based on what the NU system, as a whole, earned in a given year, rather than what PSNH earned standalone.

As a result, NU's high level of earnings for the full year of '06, driven by generating sale proceeds, raised PSNH's state income tax expense by $6.2 million over what it would have been, absent our non-recurring gains.

Last year, our wholesale marketing losses actually lowered PSNH's state income tax expense by $1.4 million.

In the fourth quarter, PSNH's distribution and generation business earned $5.8 million, compared with $9.9 million in the fourth quarter of 2005.

Again, the lower results were due, primarily, to the higher effective tax rate.

PSNH's allowed generation ROE is fixed at 9.62% and we have a fully tracking energy charge that allows us to recover all of our costs and this return.

In 2006, PSNH's overall regulatory ROE was 6.4%.

WMECO's distribution business earned $11 million in 2006, virtually, the same as it did in 2005.

Western Mass's regulatory ROE in 2006 was 9.6%.

Yankee Gas had somewhat of a difficult year in 2006, earning $11.9 million, compared with $17.3 million in 2005.

In the fourth quarter, Yankee earned $5.5 million, down from $7 million in '05.

Yankee's regulatory ROE for 2006 was 5.9%, versus a current allowed of 9.9%.

Yankee's lower results were due, largely, to lower gas sales driven by last year's very mild weather.

January of 2006 was the third warmest on record in 57 years.

November 2006 was the second warmest and December of 2006 was the warmest.

As a result, Yankee's residential sales were down 13.9% last year, compared with '05 and overall firm sales were off 11.2% or 3.2% weather-adjusted.

NU parent and its other affiliates earned about $2 million or $0.02 a share in 2006, including the effects of the generation sale.

This compares with a loss of $18.7 million or $0.14 a share in '05.

The improved results were due, primarily, to the parent company carrying a much higher level of cash in '06, as a result of the $425 million raised in our December 2005 equity offering, and the $1 billion cash infusion when we sold the competitive generating assets on November 1, 2006.

Interest income on that cash and a small level of earnings as some of our support in real estate companies more than offset the interest expense on parent company debt and other modest parent-related costs.

You can see from the news release that our competitive businesses earned $211.3 million in '06, compared with a loss of nearly $400 million in 2005.

Results in both years were heavily influenced by divestiture activities, marked-to-market accounting and impairments.

Now, turning to 2007, there are, clearly, a number of important catalysts that give us the confident to affirm guidance of between $1.30 per share and $1.55 per share that we first gave at EEI in November of last year.

The mid point of those results would translate into earnings growth of 23% over the $1.16 per share that regulated in parents segments earned in '06, excluding the [TLR].

As we said in November, we expect near-term earnings growth well above the 10% to 14% long-term annual growth rate we projected at period 2007 through 2011.

We have also affirmed the 2007 segment guidance of $0.80 to $0.90 for our distribution and regulated generation businesses and $0.50 to $0.60 per share for our transmission business.

We expect our remaining competitive businesses to break even this year, excluding any potential marked-to-market impacts, as they continue to wind down.

The most significant part of the remaining business is our wholesale obligations in [TGIM] in New York.

At the end of 2006, the amount of megawatt hour obligations related to these contracts was less than what they -- less than half of what they were at the end of 2005.

The remaining obligations stand at roughly 7.5 million megawatt hours.

NU parent and the other affiliates should amount to break even to about $0.05 per share positive, due to the interest income from the cash received from November's competitive generation sale.

In terms of specific earnings catalysts for 2007, I would like to expand on two areas: Regulatory activity and continued capital investment.

Let's start with a review of rate case activity for our four utilities.

First, at Western Mass Electric, we reached a settlement, late last year, with a number of key parties and it was approved by the Massachusetts DTE in December.

New rates went into effect on January 1 of this year and we believe the settlement will allow us to maintain a regulatory ROE in the 9% to 10% range for the year 2007 and 2008.

For PSNH, we filed a case in May of 2006 with a proposed effective date of July 1, 2006.

On July 1, New Hampshire regulators allowed us to implement a $24.5 million temporary annual increase.

We are, currently, seeking, in total, a $60 million increase, including the $24.5 million already implemented, and a 10.5% ROE.

Hearings are scheduled for mid March and a decision is expected by the end of next quarter.

A key item in this case is our proposal to create a tracking mechanism in PSNH retail rates that will track wholesales transmission costs.

CLMP and Western Mass Electric already have such mechanisms but the fact that PSNH doesn't has hurt earnings, as transmission costs are increasing.

Commission staff is supporting such a mechanism.

We are currently engaged in settlement discussions and we are hopeful that this process will result in a constructive outcome to that case.

We will keep you updated on further developments as they unfold.

At Yankee Gas, improved profitability very much depends on the outcome of the rate case we filed on December 29, 2006.

We are requesting a base rate increase of $67.8 million, about $20 million of which is attributable to the operating and carrying costs of the LNG storage facility now under construction in Waterbury, Connecticut.

The other $48 million is due to a number of factors, including higher depreciation, the need to recover a higher level of hardship customer write-offs, higher payroll costs and the need to earn an improved rate of return.

Expected natural gas commodity savings and expected property tax abatements associated with the LNG facility are expected to lower the overall increase to customer build to around $37 million or 8.4%.

The case is currently scheduled to conclude by late May and new rates would take effect July 1, 2007.

And finally, at CL&P, we expect to file a case on or around midyear of this year for new rates in effect January 1, 2008.

The outcome of this case is critical to both the improvement of CL&P's current earnings and the Company's continued desire to invest in its distribution infrastructure, thereby delivering tangible benefits to CL&P's 1.2 million customers.

In terms of capital investment, our regulated capital expenditures totaled $925 million in '06, up from $793 million in 2005.

Of the $925 million, $465 million was spent on the transmission system and $442 million on our distribution and regulated generation with the $18 million balance spent by our corporate service companies.

We project capital expenditures of about $1.2 billion in '07.

That divides into $500 million for our distribution in generation business and nearly $700 million for our transmission business.

So [for the] total capital expenditures over the 2007 through 2011 period should amount to $4.9 billion.

These figures convert into a compounded annual growth rate and total rate base of, roughly, 7% from '06 to 2011 for distribution and generation, and in excess of 20% for our transmission business.

Now, lastly, let me turn to a number of balance sheet and cash flow considerations.

Even with our robust capital program, our consolidated debt levels actually declined in 2006.

When we sold our competitive generation, $320 million of our higher-cost debt accompanied the departure of our plants to the new owner.

About $85 million of additional debt was removed from the balance sheet when we sold our energy services businesses.

Additionally, when we received our $1 billion net of debt from the generation sales in November; we paid off all of the system's external short-term borrowings.

So at the end of the year, not only did we have no borrowings on our external credit facilities, we had nearly half a billion dollars of cash.

Our balance sheet was under-leveraged, essentially, comprised of 50% debt and 50% equity.

That leverage ratio will change as we move through 2007 and beyond.

Late, this quarter, we will pay, approximately, $350 million of federal and state taxes associated with the sale [unintelligible] of our competitive businesses.

Also, over the course of the year, we expect to fund our $1.2 billion capital program in more than $100 million of dividends, while, at the same time, generating about $500 million to $600 million of internally-generated cash.

As part of our financing plan, we expect debt issuances at each of our four utilities this year, totaling, $500 million to $600 million, with the first issuance coming from CL&P over the next month or two, in the order of about $300 million.

We continue to target a capital structure of 45% equity, 55% debt at each of our regulated companies and a total leverage of up to 60% for the system, as a whole.

As we issue debt at the regulated companies, you should expect that we'll infuse cash equity from the parent into the utilities, which now has about $900 million of cash resources.

Going forward, we have no plans to issue common equity in 2007 or 2008 and will continue to evaluate whether any equity at all will be required during the latter years of our five-year plan.

The potential need for equity will depend on a number of factors, including the exact size and timing of our capital expenditures and our ability to increase internally-generated funds, as our major projects enter commercial operation.

At this point, I'd like to turn the call to Cheryl Grise.

Thank you, David and I want to thank all of you for your interest in NU over the past several years, since I began overseeing NU's distribution businesses and regulating generation.

It's been a real pleasure to work with you.

Today, I will begin by reviewing some of the highlights from 2006.

As we look back on 2006, we must remark on the impact of weather.

By and large, the cold weather months were anything but cold.

As David said, January, 2006 was the third warmest in 57 years -- which is when we began tracking the statistics -- November, the second warmest and December, the warmest.

This affected sales across all utilities, but particularly, affected Yankee Gas for residential sales were off nearly 14% from 2005.

The weather also caused repeated damage to our systems.

While we did not have a major hurricane or ice storm, we did have an unusual number of lightening and wind storms and set several new peak demands at all of the electric companies.

This stress on the electric distribution system meant that pre-tax, storm-related [O&M] that affected earnings was about $15 million higher than our budget.

We are looking forward to fewer severe weather events in 2007 and I'm glad to report that we're already off to a better start this year.

Notwithstanding these weather-related challenges, we had many notable accomplishments in 2006.

On December 1, the Northern Wood Power project, our conversion of a 50 megawatt coal unit to burn wood chips, entered commercial operation.

We completed the project for $74 million, about $1 million under budget.

We expect to burn about 450,000 tons of wood chips a year at the plant and generate about 350,000 megawatt hours and 350,000 renewable energy certificates or RECs, as we call them.

The megawatts are used to supply our customers' needs.

The RECs are sold, primarily, into the Massachusetts market, where prices are currently about $50.00 a REC.

This additional revenue source is currently allowing the plant to serve PSNH's base load, reduce its emissions and generate profits for PSNH, without a rate increase for PSNH customers.

It is a win/win situation for New Hampshire.

Overall, PSNH generation had a strong year in 2006.

Unit availability was 88.7%, up 1.5% from 2005.

During the 30 highest-priced days of the year, when we most want our units to be available and running when dispatched, unit availability was 97.6%, the highest level since we began tracking that statistic in 2001.

With the Northern Wood Project complete, we have turned our attention to beginning the design of a [scrubber] to significantly reduce mercury and sulfur emissions at our Merrimack plant.

Under legislation passed in New Hampshire, last year, this project must be operational by mid 2013 and we expect major construction to begin around 2010.

Yankee Gas is $108 million, 1.2 billion cubic foot [LNG] storage project in Waterbury, Connecticut is now about 90% complete and we expect to begin storing natural gas there this spring for the 2007/2008 heating system.

It is on time and on budget.

The facility is the centerpiece of an effort to increase reliability and operational flexibility, as well as save customers about $10 million a year, as David mentioned.

Another project we completed in 2006 was the launch of the new state-of-the-art customer service center in Windsor, Connecticut.

The new facility was designed to support our system wide customer service integration, which will enable the Company to enhance its day-to-day service capabilities and handle increased call traffic during power outages.

An upgrade and expansion of the Manchester, New Hampshire customer service center will be completed this summer, as part of the transition from six customer service centers, too, and we expect all four of the utilities to convert to the new consolidated information system before the end of this year.

We expect this consolidation to improve service and allow us to realize several million dollars a year in annual savings.

As we noted at EEI in November, we have significantly increased CL&P's estimated distribution capital expenditures in 2007 to $270 million from the $210 million we spent on CL&P distribution in 2006.

We increased these estimates, to a large extend, because of the stress that hot weather, this past summer, caused on our distribution equipment, particularly, underground equipment in larger communities such as Stanford, Waterbury, and [Meredith], Connecticut.

We firmly believe that the DPUC will support this additional capital spending in 2007 and in late years, in the rate case that we'll file later this year.

We'd love to make sure that the Commission understands that if peak [unintelligible] at CL&P continue to grow 3% to 4% a year.

Even if overall kilowatt hour sales are not rising, we need to operate an energy delivery system that can meet those loads reliably and to recover associated capital costs in rates.

Let me, again, thank you for your interest in NU over the years and now, I will turn the call over to Lee Olivier.

Thank you, Cheryl, and thank you, everybody, for joining us on the call.

Today, I would like to operate you on the progress we're making on our transmission segment, but I look forward to discussing our distribution and generation operations with you, in future calls.

NU's transmission segment had a very strong year in 2006, in terms of operations, capital deployment, project management and regulatory progress.

Operationally, we had a good year, particularly, this past summer.

We were able to sustain peak loads, even in electrically-congested southwest Connecticut that were not expected until 2009.

We also had very strong safety performance in favorable preliminary results from our first North American Electrical Liability Council readiness audit of operations.

As we have said in the past, the 2005 Energy Policy Act contains the potential for stiff penalties of substandard operations of a transmission system and our goal is to be one of the nation's top transmission system operators.

From a capital deployment standpoint, we net, in many cases, exceeded our target.

Twenty-one-mile, 345 [unintelligible] oil transmission line entered commercial service October 12, about two months ahead of schedule and about $2 million below its $350 million budget.

It has operated lively since then.

On December 16, we placed in service a new substation in [unintelligible] Connecticut that allows us to better connect our 345 [unintelligible] and 115 [unintelligible] transmission systems in [northeast] Connecticut.

The project was completed on schedule and about 2% below its $32 million budget.

The Bethel to Norwalk project is one of four major projects we have commenced to improve both power and reliability in southwest Connecticut.

The other three are on budget and are on or ahead of schedule.

In 2006, we began construction of the [unintelligible] in Norwalk and [Limberg Cables] projects, and signed contracts to begin production of a replacement cable under Long Island [SAM].

Our $1.47 billion share of this 69-mile, 345 [unintelligible] project we're building with United Illuminating is now approximately 16% complete and we are targeting completion in 2009.

One hundred eighty-three million dollar nine-mile, underground, 115 [unintelligible] [Limberg Cables] project between Norwalk and Stanford is about 20% complete.

Both this project and the [unintelligible] project benefited from miles [unintelligible] weather and lack of snow, allowing us to work longer than usual, into the winter and under state and local roads.

Additionally, the replacement cable for our interconnection between Norwalk and [Northport] Long Island, a project we are undertaking with the Long Island Power Authority is now being manufactured in Norway, and we expect to install it next winter.

After the projects are complete in 2008 and 2009, our focus will shift toward a series of projects being planned with National Grid to improve reliability and electric transfer capability across southern New England.

To date, we have referred to this family of projects as the Southern New England Transmission Reinforcements or SNETR but the name has changed to more accurately reflect the characteristic of the problem and the proposed solutions.

These projects will now be referred to as the New England East/West Solutions or the acronym, NEEWS.

The projects will dissolve reliability concerns in the western Massachusetts Springfield area, central and [northeast] Connecticut, as well as western Rhode Island.

NU will be responsible for western Massachusetts and Connecticut upgrade, and National Grid will resolve the Rhode Island concerns.

These projects will be closely coordinated by both companies as some segments must interconnect when completed. [ISO] New England will soon conduct a technical review of these projects and we expect to file applications with Massachusetts and Connecticut, citing regulators, by the end of this year.

At this time, based on 100% overhead construction, we expect our costs through 2013 to be between $1.1 billion and $1.4 billion.

But I remind you that we are only in the very early stages of these projects and cost design can [still] quick change significantly before we are done.

Our existing five-year capital plan through 2011 has $710 million allocated for those projects.

On a regulatory basis, we will remember 2006, to a great extent, as the year the Federal Energy Regulatory Commission completed its generic work on transmission census and as the year the New England Transmission [unintelligible] received a decision on their allowed return on equity.

We believe that, first, generic transmission financial incentive decision is focused, as it should be, on encouraging the construction of transmission where it is most needed.

As we said at EEI, the New England Transmission decision allows us to earn return on equity of 12.4% on new transmission investment that is part of the regional system plan and lower returns on older facilities and a small portion are new assets that will not be part of the regional system plan.

We continue to believe that, based on the decision that was issued in October, we should earn a blended return of about 11.8% in 2007 on our transmission equity, rising to about 12.2% by 2011, when more of our plant will be built and earn the higher incentives that are available.

I should note, though, that several parties asked for [us] to reconsider this return on equity decision.

One of those parties, the New England transmission owners, has identified an error where we believe FERC used the wrong exhibit to develop its list of comparable companies.

Something that, if addressed, we suggest could add another 30 basis points to our return on equity.

Other parties, including the state, believe FERC's incentive return on equities should be trimmed.

We expect it to take a while but for it to rule on these motions and we will put earnings, in the meantime, based on the October 2006 decision.

Thank you, again, for your time and I'll return the call back to Jeff.

And I'm going to return the call to our conference operator, Christine, so she can remind you how to enter questions.

Thank you, sir.

At this time, we'd like to begin the question-and-answer session of the conference. [OPERATOR INSTRUCTIONS]

Thank you very much.

Our first question today is from [Anthony Crowdell] from Jefferies.

Anthony?

Good afternoon, Jeff.

A question on the Connecticut Light and Power distribution rate case that you'll be filing, I guess, this summer.

What type of rate increase are you guys forecasting to get you to allow [unintelligible] of about 9.85?

Anthony, this is David.

It is very early in our preparations of that document and in that case and we have not worked through that math now.

We are formulating our position on what direction we want to take the case, formulating our position on what ROE that we'll pursue and obviously, that gets us to an answer around the percent.

It's too early, Anthony.

Okay, thank you.

Thank you.

Our next question is from [Terry Schu] from JP Morgan.

Terry?

Yeah, if you could, Chuck or anybody on the line, comment on what you think might happen this year with the Connecticut legislature.

You said that it's a top priority for them.

What do you think might happen and how will it unfold?

Terry, this is Chuck.

That's a great question and one that we continue to ask ourselves.

I think it's fair to say, right now, that the policymakers in Connecticut, in the Connecticut legislature really span a very broad spectrum of different suggestions.

We go from some policymakers suggesting that we should continue to move with the competitive marketplace to others that probably are closer to re-regulation and I would imagine pretty much everything in between.

It is too premature to speculate on exactly where the legislature will come out, in terms of its debates.

The two things that we have said consistently that we think are critical to this debate, however, are the fact that Connecticut needs a comprehensive planning process that the utilities should be very much a part of that will allow us to design the best system for the State of Connecticut and for the region.

I think the second thing that we've said is that, as part of that process, the State of Connecticut needs all the appropriate auctions to consider when they evaluate what is the best energy policy for the customers and for the homeowners and businesses in Connecticut.

That would include the utility's ability to try to transact directly with generators, the potential for utility-owned generation, as well as the other options that are available to them.

So we have been pretty consistent, I think, Terry, over the past year or so in outlining the things that we think should go into this process but it really is too premature to speculate on the outcome of that legislative session.

Okay, are you taking a strong stance about utility involvement in long-term resource planning and being able to build generation?

We are very much taking a strong stance about utility involvement in long-term resource planning.

We think that's absolutely critical.

There will be a number of stakeholders that we'll need to weigh into that discussion but clearly, the utilities we think have the expertise and the view that are critical to putting together any long-term plan.

As for utility generation, we have said, for the last year or so, that we think that is an option that should be available to the state, if that option, in fact, produces the best results for our customers.

Thank you.

Thank you, Terry.

Next question is from [Erica Fesercia] from Merrill Lynch.

Erica?

Hi, just I guess, to drill in, a little bit, on the legislative issue, I think, earlier this month, there were a few bills that were kind of being circulated out of committee and I think there was one from the House that kind of had the regulated generation issue attached to it and then there was another one in the Senate and I think there were some hearings, a couple weeks ago, too.

Is there any one bill that's kind of need, you know, more movement than the others or are we still in a situation where there's just a bunch of things kind of floating around and the support from the Senate and the House leadership is still kind of up in the air?

I think your assessment is correct, Erica.

As you noted, there have been some bill -- one in the House bill that moves in one particular direction.

One in the Senate that probably goes a little bit in the other direction.

They have had hearings on the House bill.

We have testified at that hearing.

It is premature right now, to speculate on where they will actually come out on any of those bills.

Okay and then just one follow-up.

Can you give us a sense of where -- I know you said you managed the utilities to a 45%, 55% cap structure.

Where, you know, for year-end '06 for, you know, for the utilities, where did that end up, relative to that structure that you managed it to?

Is it roughly -- I assume, roughly, in that range or --

Erica, I think, right across the board, we were within a percent or two of that number.

I know, if you look at, for example, CL&P's equity ratio, as it's constructed under our regulation, it was at 47% so, right in that same neighborhood for all utilities.

Okay, thank you.

And Cheryl, congratulations.

Thank you, Erica.

I'll miss you.

Great, well, thank you very much for joining us today.

If you have any follow-up questions, please, give us a call either today or tomorrow, later in the week.

So thank you very much.