康涅狄格電力 (ES) 2007 Q1 法說會逐字稿

Thank you very much and good afternoon and thank you everybody for joining us.

Speaking today will be Chuck Shivery, NU's Chairman, President and Chief Executive Officer; David McHale, NU's Senior Vice President and Chief Financial Officer; and Lee Olivier, NU's Executive Vice President who oversees our regulated businesses.

Also in the room today is Shirley Payne, 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 Securities Litigation Reform Act of 1995.

(technical difficulty) 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 included in the forward-looking statements include but are not limited to actions by state and federal regulatory bodies, competition and industry restructurings; changes in economic conditions; changes in weather patterns, changes in laws, regulations or regulatory policy; changes in levels and timing of capital expenditures; developments 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 unforeseen factors.

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

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

I'll now turn over the call to Chuck.

Thank you, Jeff.

Thank you for joining us this afternoon.

I know many of you have listened to a number of conference calls today and our most recent call was only two months ago, so we'll make sure that today's call is both informative and concise.

If you've had a chance to review the news release we issued earlier this afternoon, you will see that our earnings were up considerably this year over last year.

On a reported basis we earned $0.49 a share in the first quarter of 2007 compared with a loss of $0.07 a share in the first quarter of 2006.

Our regulated businesses and the parent company earned $0.46 a share compared with $0.34 a share in 2006, more than a 30% increase.

We were pleased with these results and they are consistent with 2007 earnings guidance and our long-term growth projections we provided to you last November.

As you know, our strategy involves expanding our regulated infrastructure to provide a reliable energy delivery system in New England.

The success of that strategy is showing up in our bottom-line and in our service to customers.

For our investors we expect to continue to offer earnings per share growth that is above the industry average and for our customers we will make their energy delivery systems more reliable.

For example, we can now see that are recently completed Bethel-to-Norwalk 345,000 bolt transmission line is improving regional reliability and reducing congestion costs charged to CL&P customers.

We also believe that once complete our LNG facility in Waterbury, Connecticut will enable Yankee Gas to reduce the natural gas commodity and pipeline capacity charges billed to Yankee Gas customers by an estimated $26.5 million annually.

Many of the drivers in the quarter are the drivers of our long-term growth.

Our transmission earnings grew by 25% because we have much more transmission plant on our system today than we did a year ago.

Our distribution and regulated generation earnings rose by about 15% in the quarter.

We were pleased by that performance which is also consistent with our 2007 guidance.

In addition, we continue to focus on regulatory initiatives such as the rate settlements in both our Massachusetts and New Hampshire jurisdictions and our current Connecticut Yankee Gas rate case that we believe will improve our distribution returns.

Improved parent company results were due primarily to interest earned in 2007 on the proceeds related to the November 1, 2006 sale of our competitive generation facilities.

Turning to legislative developments, we continue to work with legislative leadership to construct legislation to help address some of the high-priority energy issues facing Connecticut.

On March 13th the Connecticut Legislature's energy and technology committee issued favorable recommendations on a number of bills.

Among other initiatives the bills seek to increase energy conservation funding, accelerate installation of smart metering, provide more flexibility for procuring provider of last resort energy, and encourage the construction of new generation in Connecticut.

We expect the legislative leadership to combine many of these elements into a single bill that would move through the Legislature before the session ends on June 6th.

Earlier this week we had some new developments concerning the Connecticut Legislature's 2005 Energy Independence Act.

On Monday the Connecticut DPUC issued its draft decision and its docket to reduce federally mandated congestion charges.

The DPUC selected four projects that would be eligible to sign contracts with CL&P and United Illuminating.

They include three new generating plants that combined would provide Connecticut with 782 mg of generating capacity and a fourth comprised of 5 mg of demand side measures.

The contracts can be for terms of up to 15 years and the draft incorporates a provision that CL&P sought regarding cost recovery of these arrangements.

If the draft is adopted utilities would be required to sign contracts with the generators by May 18, 2007 and he DPUC would then give final approval to the contracts by August 15th.

In New Hampshire on April 5th the House of Representatives approved and sent to the Senate a bill which would establish a renewable portfolio standard for electricity sold in the state.

That bill would require that 23% of the electricity sold to retail customers in New Hampshire have direct ties to renewable resources by 2025.

We were supportive of that bill.

Also in New Hampshire on April 12th the Senate approved a bill that directs the New Hampshire PUC to encourage upgrades to the transmission system in Northern New Hampshire, directs the state site evaluation committee to develop new rules for siting renewable facilities by October 2007, and adds utility ownership of distributed renewable generation and demand-side management to the topics that the Legislature's standing state energy policy committee should exempt.

That bill now goes to the House.

We were however disappointed that the Senate did not vote this year to allow us to build additional renewable generation, but we will continue to pursue this potential investment which we think would be positive for New Hampshire's consumers, its economy, its environment and its long-term energy diversity.

Now let me turn the call over to David.

Thank you, Chuck.

I will start by providing some color around the earnings we reported this quarter which, as Chuck said, showed solid results and are a good indicator of our future financial performance.

As you can see from the news release, earnings were $75.1 million in the first quarter compared with a loss of $10.1 million in the first quarter of 2006.

Distribution and regulated generation earnings were up $6.3 million or 15%; transmission earnings were up $3.2 million or 25%; the parent and affiliates improved by $8.3 million from a loss of $2.1 million last year to a gain of $6.2 million this year.

Looking at our businesses from an operating company perspective, earnings were up at each of our four utilities with CL&P's results up $1.1 million; PSNH up $4.9 million; WMECO $1.7 million; and Yankee's earnings up $1.8 million.

Overall these figures support our 2007 earnings guidance of $1.30 to $1.55 a share and are consistent with our projected five-year annual EPS growth rate of 10 to 14%.

To add some additional detail I will first focus on transmission where we earned $15.9 million or $0.10 per share compared with $12.7 million or $0.08 per share in the first quarter of 2006.

This increase was due to the increased investment in our transmission system which flows through to the bottom-line as a result of our FERC approved wholesale rates.

82% of those transmission earnings were at CL&P which we would expect since most of our transmission investment for the past two years has been in Southwest Connecticut.

Transmission rate base was approximately $1.05 billion at the end of 2006 and we expect to grow to about $1.4 billion by the end of 2007.

We continue to project transmission earnings this year of between $0.50 per share and $0.60 per share.

On the distribution and generation side overall earnings rose to $48.2 million in 2007 from $41.9 million in '06.

CL&P earnings fell to $20.6 million or $0.14 per share from $23.4 million or $0.15 per share in '06.

This decline occurred primarily because of the absence of benefits we received last year from a state tax settlement that added about $4.9 million to 2006 first-quarter distribution earnings in the December 31, 2006 expiration of the fixed procurement fee which provided CL&P with about $7 million a year of earnings from 2004 through 2006.

As we have communicated previously, CL&P's $7 million annualized distribution rate increase, which took effect on January 1, 2007, will not be adequate to cover the Company's rising interest, depreciation and property tax costs related to its increased distribution capital spending.

As a result we continue to expect CL&P to earn between 6 and 6.5% return on equity this year.

This underscores the need for distribution rate relief and we continue to anticipate filing a distribution rate case in midyear to be effective in early 2008.

At PSNH distribution and generation we earned $8.1 million in the first quarter, up from $2.5 million in the first quarter of 2006.

A number of factors contributed to that improvement including a temporary rate increase that took effect last summer, a 2.7% increase in retail sales and a lower effective tax rate.

We believe the foundation for longer-term distribution and earnings improvement at PSNH is in place.

As you know, a distribution rate settlement was reached in PSNH's rate case in February and a brief hearing was held in March during which no opposition to the settlement was voiced.

A Commission decision is expected in the second quarter and, if the settlement is approved, new rates would take effective July 1, 2007 and be retroactive to July 1, 2006.

As such PSNH will recoup nearly $9 million of revenues that are attributable to the July 1, 2006 through June 30, 2007 time period.

From an earnings standpoint we expect to report about $5 million of pretax earnings in the second quarter of '07 when we expect the approval of this settlement will be finalized and another $3 million ratably over the 12 months beginning July 1, 2007.

Lee will describe additional aspects of the settlement, but it is based on an authorized ROE of 9.67%.

We expect PSNH will be able to earn between a 9 and 10% ROE on our distribution equity for 2007 and 2008.

Western Mass Electric's distribution segment earned $5.9 million in the first quarter compared with $4.2 million in the first quarter of '06.

The improved results were due to a 1.7% increase in retail sales and the Company's new distribution rates that took effect January 1, 2007.

As we've said before, we believe WMECO's two-year rate settlement will be adequate to keep Western Mass' earnings in the 9 to 10% range during the two-year duration of the rate settlement.

In terms of sales, largely due to colder weather overall electric sales rose by 1.9% in the first quarter compared with the same quarter of 2006.

They were up 0.3% on a weather adjusted basis.

By class actual residential sales were up 5%, commercial sales up 1.3%, but industrial sales declined 6.5%.

The decline in industrial sales is a continuation of a long-term decline in industrial activity in our service territory as well as a continued move toward increased energy efficiency by these customers.

In the first-quarter industrial sales comprised less than $1.3 million of the nearly $9.2 million mg hours we sold to our customers, only about 14% of total retail sales.

Yankee Gas saw more significant sales gains in the quarter.

Heating degree days were average in the first quarter of '07 compared with 10% below average in the first quarter of '06.

As a result firm natural gas sales were up 10.9% in the first quarter compared with the same period of '06.

That increase helped Yankee Gas' earnings, which were $13.6 million in the first quarter of '07 compared with $11.8 million in the first quarter of '06.

Despite the improved first-quarter results Yankee Gas' earnings are still well below our long-term return on equity target for our distribution businesses.

We expect that Yankee's earnings will begin to recover in the second half of this year as a result of the $68 million distribution rate case that is now in the final stages before Connecticut regulators.

At our request the Connecticut Commission has suspended the schedule to allow Yankee Gas and other parties to engage in settlement discussions.

Currently a final decision is scheduled for late this quarter and we expect new rates to take effect July 1, 2007.

As we have said in the past, we expect that about $31 million of the $68 million increase Yankee is requesting will be offset by the lower commodity costs and property tax abatements associated with Yankee's $108 million LNG storage facility.

That fact makes the 8.4% overall rate increase more manageable for our customers.

Overall we continue to project earnings in the utility, distribution and generation business of between $0.80 and $0.90 per share this year.

Turning to our competitive business which is now largely divested.

We recorded net income of $4.8 million in the first quarter compared with a loss of $62.6 million in the first quarter of last year.

This quarter's earnings were due in part to a $1.5 million positive after-tax mark to market change on our remaining wholesale contract obligations and to several small but positive outcomes relating to the businesses that we have divested.

Last year's large loss was due to a write-off in our retail marketing business which we sold in its entirety on June 1, 2006.

To update you on our ongoing divestiture activities -- on May 31, 2007 four of our remaining five PJM wholesale electricity contracts expire with the fifth expiring a year later.

We also have a single wholesale sales contract with an association of New York municipalities that runs to 2013.

The load that we serve under this contract is seasonal in nature and we have significantly hedged out our obligations there.

We continue to evaluate the most effective and expeditious means of divesting our remaining competitive business activities and will update you periodically.

We continue to forecast breakeven results for the year for this business excluding mark to market impacts which, as I said, were modestly positive in the first quarter.

Our parent company and affiliates earned $6.2 million in the first quarter compared with a loss of $2.1 million last year.

The gain was largely due to interest on nearly $1 billion of cash we carried at the parent for most of the quarter.

As expected, NU parent's cash levels declined significantly in the first quarter as a result of about a $400 million tax bill that we paid the IRS as a result of taxes coming due related to last year's competitive generation sale.

Cash levels will continue to decline over the balance of the year as NU parent continues to infuse equity into the utilities as they build out their infrastructure.

For example, in the first quarter we made equity contributions of about $215 million into CL&P and nearly $10 million to PSNH and $5 million into Western Mass Electric.

With cash levels lower at the parent you should not expect to see the same level of interest income in that segment over the balance of the year as we did in the first quarter, and we continue to project earnings there of between $0.00 and $0.05 per share.

We've attached our balance sheet to the financial statements we distributed today so you can see that the debt to total capitalization ratio was about 52.5% at March 31, '07, up somewhat from the 50% at year-end.

This was due in large part to the issuance of $300 million of CL&P bonds last month.

You will also notice that while there remains no short-term debt in the system, our level of externally invested cash declined primarily due to the $400 million tax payment related to the generation sale as well as $221 million of capital expenditures in the quarter.

We continue to estimate total capital expenditures of about $1.2 billion this year including about $700 million in transmission and $500 million in our other business segments.

We expect to issue additional debt at all of our regulated companies over the balance of the year, about $200 million at CL&P and about $50 million at each of our other utilities.

Due to the strength of our balance sheet we continue to rule out issuing additional common equity this year or next.

And as we said before, whether we require new common equity at all in 2009 or beyond will depend largely on the size and pace of our capital program and the rate at which our cash flows increase as major projects are constructed and placed into service.

I'll now turn the call over to Lee.

Thank you, David, and good afternoon to everyone on the call.

Today I will cover all of our utility operations beginning with our distribution businesses which I began overseeing early this year.

Reliability in our distribution system was good in the first quarter as we avoided some of the severe winter weather that gripped parts of the Midwest.

As a result we benefited by lower O&M expenses.

Our LNG facility in Waterbury is now more than 91% complete, on time and on budget and we expect to begin filling it with natural gas in June.

Our base load coal units in New Hampshire operated at an average capacity factor of about 93% in the first quarter, well ahead of target, which is saving customers millions of dollars through our low fuels cost and fully tracking generation charge.

The Northern Woods Power Plant, our woodfired unit in Portsmouth, New Hampshire, which many of you visited in 2005, returned from a scheduled maintenance outage early this week and is at full power.

As Dave mentioned, a critical factor to the financial success of our distribution businesses in 2007 and 2008 will be the outcome of our distribution rate cases.

The PSNH rate case settlement supported by Commission staff and the Office of Consumer Advocate and now under consideration by the New Hampshire Public Utility Commission includes a number of positive items for us.

First, it allows for a transmission tracker, very similar to what we already have at Western Mass Electric and Connecticut Light and Power.

It will allow public service in New Hampshire to recover its rising wholesale transmission cost without regulatory lag.

If approved by the New Hampshire PUC, the tracker will be retroactive to July 1, 2006.

The rate will be set for the first time on July 1, 2007 and will reset annually beginning on January 1, 2008.

If we over recover our transmission cost in a 12-month period we will refund those over recoveries to customers.

If we under recover them we will defer those costs and recover them over the following 12-month period.

Our Yankee Gas rate case is nearing the end.

We have commenced settlement discussions with other parties, but we do not yet know if we will be able to reach a settlement.

Regardless of whether the case is fully litigated or settled, we expect a final [review] decision by the end of June with new rates effective July 1, 2007.

Turning to transmission, we had a good quarter both operationally and financially.

Our transmission reliability performance has been strong including our new Bethel to Norwalk line commissioned in October of last year.

In June we expect that the North American Electric Reliability Council, or NAERC, will commence a compliance audit of our transmission operations.

This audit is consistent with FERC's approval of NAERC's compliance and enforcement program and the formal beginning of mandatory reliability standards for the transmission industry.

We continue to place put in place a comprehensive compliance program to meet these new standards and we have seen the results of this ethic in the recently issued NAERC readiness audit of our transmission operations which was very positive.

On the regulatory side of the business FERC issued an order denying rehearing in the rule on transmission pricing incentives.

FERC denied a rehearing stating that it will assure that incentives sought by an applicant are appropriate to address risks associated with a specific request.

Turning to our transmission projects, our 1,047,000,000 share of the 69 mile 345-kV Middletown-to-Norwalk project we are building with United Illuminating is now approximately 24% complete and we are targeting its completion in 2009.

There are no remaining siting or regulatory obstacles to this project and all major contracts have been issued.

So our focus is on the construction process at this time.

The 183 million 9-mile underground 115-kV Glenbrook cables project between Norwalk and Stanford is about 30% complete and on schedule.

CL&P's $72 million share of an 11 mile undersea replacement cable between Norwalk, Connecticut and [Norfolk], Long Island is on schedule.

Engineering, permitting, contracting and cable manufacturing are complete or well underway.

The project is approximately 33% complete and expected to enter service in 2008.

The new solid cables will replace 35-year-old existing foil filled cables and will enhance reliability and transfer capacity in the constrained Southwest Connecticut and Long Island regions.

The cable is now being manufactured in Norway and we expect to install it next winter.

We received a draft permit earlier this month from the Connecticut Department of Environmental Protection that supports our schedule and budget for this project.

Our southwest Connecticut upgrades will be complete in 2009 and they will benefit customers through increased reliability and reduced annual congestion cost, as Chuck noted earlier.

While the Southwest Connecticut projects relieve very critical bottlenecks within Connecticut, they do not address the need to be able to move power between Eastern and Western New England.

And they also do not help what has become in recent years near overload situations in and around Springfield, Massachusetts.

You have heard us speak for the past year or so about the New England east-west solutions, or NEEWS for short, a series of projects we fondly called SNETR.

Today I will provide you with more detail about those projects and specifically discuss the Springfield area upgrades.

A 115-kV system in the Springfield area; an infrastructure that has been in place for over 50 years is in need of modernization.

Current peak demand growth is already outstripping our capacity resulting in threats to reliability of the system.

The proposed system modernization will ease the capacity overloads, minimize the risk of future outages, improve reliability as demand continues to increase, and set the stage for enhancing access to competitively priced power and renewable energy.

It consists of 16 miles of underground transmission lines -- of upgraded transmission lines, 8 miles of new underground circuits and the rebuilding of several substations.

We have been working with ISO-New England to identify all the upgrades needed on the system and expect to ask for a technical approval from NEPOOL and ISO-New England by the fall 2007.

Once the technical approval is received we will present our proposals to the Massachusetts NG facility siting board currently planned for late 2007.

We hope to receive all necessary siting approvals and begin construction by late 2008 or early 2009 and complete the 115-kV work around Springfield by 2010.

At this time we expect this series of upgrades to be undertaken solely by Western Mass Electric and cost between $250 million and $350 million.

At the same time, as part of the NEEWS projects, we will be working with ISO-New England and National Grid to better define the upgrades to the 345-kV transmission system needed in Massachusetts, Rhode Island and Connecticut.

These upgrades when completed will more effectively tie together the 345-kV grid in Southern New England creating a more reliable system, one better able to handle future demand growth and one that will benefit the operation of a competitive wholesale market by eliminating bottlenecks that currently restrict low-cost power from region constrained areas.

The NEEWS upgrades consist of four groups of projects.

First, CL&P and Western Mass Electric expect to build new 345-kV lines from Western Massachusetts area into Connecticut.

Second, National Grid will upgrade the ties between Northern and Central Rhode Island.

Third, National Grid will expand the 345-kV system in Central Massachusetts and Rhode Island to the Connecticut border.

CL&P would build a Connecticut section of that third group of projects and would also build a fourth group of projects in Central Connecticut.

We expect to work with ISO-New England and National Grid on the technical review of these 345-kV projects throughout the balance of this year and begin filing the first project applications with the various state siting authorities shortly after receiving the technical approvals.

At this time we expect construction to begin in 2009 and be complete in 2013.

Assuming virtually all of the 345-kV work is constructed overhead and on existing right-of-ways, our very early conceptual estimate for NU's share of these projects, including the Springfield 115-kV upgrades, would be between $1.1 billion and $1.4 billion.

At this time we expect the expenditures to be at the high end of that range.

The timing of the expenditures is highly dependent upon receipt of technical and siting approvals.

But consistent with our last forecast, we continue to believe that we will spend $710 million on these projects by the end of 2011.

Now what I'd like to do is to turn the call back over to Jeff Kotkin.

Thank you, Lee.

And I'm going to return the call to Grace so she can tell you how to enter any questions you may have.

(OPERATOR INSTRUCTIONS).

Paul Patterson, Glenrock Associates.

I wanted to ask you about the capacity auction in Connecticut and looking through the details that were made available by the DPUC, it was sort of high-level and I was wondering if you guys were able to -- when you guys reviewed it and saw what it went through, whether you came up with a per kw kind of value that these projects were bid in or the price that's going to be paid.

Paul, no, we do not have that information at this point in time and we're still looking at this I think the same way that you are.

We don't have the information about a per kw cost or how they were bid in held by the DPUC.

Okay.

And just a clarification.

Did I hear you right that the new transmission project that you just went over, you're expecting a total potential investment (inaudible) at 1.1 to 1.4 between the 2009 to 2013 period and that $710 million of that would be spent by 2011?

That's correct, Paul.

And as stated, that does not include any underground in Connecticut and Connecticut has an underground in its statute.

We're in the process of doing the technical evaluation and also looking at proposed designs against that statute.

So late this year we'll have a better sense of how much of the lines in Connecticut will have to be underground.

And of course to the point that they have to be underground that will be increased cost above the $1.1 billion to $1.4 billion.

And do we have any idea about how much that could increase the cost?

I can't give you a hard figure, but generally speaking underground is three to four times more than overhead construction.

Okay.

So depending on how much you have to put underground there could upside to that number?

That's correct.

And then just finally, on the whether adjusted demand, it looked like residential was up to about 2% if I read the release correct.

And I was just wondering, do you think that we've seen the -- what do you think has happened here with elasticity?

Do you think it's now (inaudible) got accustomed to the price and we're going to see a more normal demand growth or just any comment on what you're seeing there?

Paul, this is David.

This is obviously something that we've been studying now for several quarters if not longer.

What we do know in terms of customer count as we've analyzed the first quarter is that roughly customers are in line with our expectation in terms of the new customers that have come on line.

And I think it's a little early for us to tell in the game whether or not customers are really adapting to the price per kilowatt hour.

I don't think we'd jumped to that conclusion and spend a little bit more time kind of serving this particular sector.

But I think from a customer count standpoint, right on track.

In terms of usage, we'll continue to follow that.

Thanks a lot, guys.

Erica Piserchia, Merrill Lynch.

A couple of my questions have been answered, but I guess just on the timing of the filing of the CL&P rate case, you've talked for a while about filing mid-year and getting a decision I think you said early '08.

Is that -- you're still targeting to implementing new rates January 1st, or is there a possibility that that could slip at all as far as timing?

Erica, this is Lee Olivier.

You've pretty much outlined what we believe the schedule will be -- a filing around the 1st of July with rates essentially effective in the beginning of January of 2008.

Okay.

And you guys do a notice of intent the month before, right?

So beginning of June or something?

That's correct, we do.

Okay.

Thanks, guys.

That was all.

Great.

Well, thank you, Erica.

And as of right now we don't have any additional questions.

Oh, Maury May -- it looks like we've got a question from you, so ask away.

Just one question.

Again, following along the lines of the previous question on CL&P rate case.

Do you expect to include any kind of decoupling and smart grid requests in that rate case?

Decoupling is something that we are looking at right now, Maury.

This is Lee Olivier.

We're looking at that right now and we haven't made a final determination on decoupling.

As you know, decoupling is becoming ever popular in the Northeast, so we haven't made a final determination on that.

In terms of smart grid, we don't have a filing on smart grid per se.

But as you're probably aware, we did do a filing recently on automated meter infrastructure as a result of the time of use docket that Connecticut DPUC has ongoing.

We have a technical conference set up with the DPUC in the latter half of May to discuss that.

It's a compliance filing for 175,000 meters and in that compliance filing we have provided recommendations to install up to 1.2 million meters in CL&P, but that will be a determination that will be made by the DPUC.

Okay, good.

Thank you very much, folks.

Maury, thank you for the question.

We don't have any more questions right now, but we'll be around later today and tomorrow.

And for those of you who are attending the AGA conference, we'll be down there next week.

So we look forward to speaking with you and have a great rest of the afternoon.