康涅狄格電力 (ES) 2008 Q2 法說會逐字稿

Welcome to the Northeast Utilities second quarter earnings conference call.

All participants will be in a listen only mode until the formal question-and-answer session of the conference.

(OPERATOR INSTRUCTIONS) Your host for today's call is Mr.

Jeffrey Kotkin, Vice President of investor relations.

Mr.

Kotkin, you may begin.

Good morning and thank you for joining us.

I am Jeffrey Kotkin, NU Vice President for investor relations.

Speaking today will be Chuck Shivery, NU Chairman, President and Chief Executive Officer; David McHale, NU Senior Vice President and Chief Financial Officer; and Lee Olivier, NU Executive Vice President and Chief Operating Officer.

Chuck is joining us from the annual [EFRI] Conference in California.

Also with us today are Shirley Payne, our Vice President and Controller and Jim Muntz, head of our transmission segment.

Before we begin, I would like to remind you that some of the statements made during this conference call may be forward-looking as defined within the meaning of the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995.

These forward looking statements are subject to risk and uncertainty which may cause the actual results to differ materially from forecast and projections.

Some of these factors are set forth in the press release issued Friday announcing our earnings for the second quarter of 2008, as well as in the slide packet we have posted on our website to accompany this call.

If you have not yet seen those slides, they are located in the investor section of www.NU.com under presentations and webcasts.

Additional information about the various factors that may cause actual results to differ can be found in our annual report on form 10-K for the year ended December 31, 2007.

Additionally our explanation of how and why we use certain non-GAAP measures is contained within both our news release and the slide packet and in our most recent 10-Q and 10-K.

Now I will turn over the call to Chuck.

Jeff, thank you.

Good morning, and let me also thank you for joining us.

We are pleased with the success we've achieved on behalf of both our customers and their shareholders during the first half of this year, particularly given the economic and energy cost environment in which we operate.

In fact, as a result of these successes we have raised our earnings guidance for 2008.

But before Lee and David provide you with details on our year-to-date results I want to comment on recent public policy initiatives in New England as well as advances in our own strategic initiatives.

As we've discussed before, I firmly believe that this Company will continue to succeed if it achieves results that benefit our customers and are consistent with public policy directives of our political and regulatory leadership.

Although New England faces many challenges, the environment in which we operate also provides many opportunities.

Our success in building transmission in southwest Connecticut is a case in point.

On July 29, ahead of schedule, we energized our solid core replacement cables beneath Long Island Sound, completing a more reliable high-voltage connection between Connecticut and Long Island that will also have better environmental profile.

In early 2009 we expect to place in service the last of our four major transmission projects that we began discussing publicly in 2001.

These projects are making southwest Connecticut's transmission system far more robust and reliable and have enabled grid operators to depend far less frequently on older, inefficient, more costly and less environmentally friendly plants to serve loads in a region that consumes half of Connecticut's electricity.

These projects also have been the most significant factor in our improved financial performance in recent years, creating a strong alignment between customers and investors.

We expect the largest and final southwest Connecticut project, Middletown to Norwalk, to be completed 9 to 12 months ahead of schedule and at least 5% below its $1.05 billion budget.

We believe our success with Middletown to Norwalk is indicative of one of our most important core competencies, the ability to site, source and build major transmission projects that can provide significant customer benefits.

Our New England East-West Solution or NEEWS projects will provide another opportunity to utilize those core competencies.

Later this year, along with National Grid, we will begin filing formal applications to construct a series of transmission lines to enhance the 345kV interstate grid of southern New England, removing bottlenecks and vulnerabilities to our system and enhancing the flow of more competitive power.

These NEEWS projects will be every bit as significant to our customers and to our investors as the southwest Connecticut projects have been, and Lee will provide a preview of the siting and expected construction schedule shortly.

NEEWS is consistent with our overriding strategy.

In addition to its primary purpose of improving the region's reliability, NEEWS will prove a number of secondary benefits.

As energy prices and the cost of construction continue to rise and as New England implements its regional greenhouse gas initiative and renewable portfolio standards, we need to find solutions that will allow our customers to use their energy more efficiently and to obtain more of that energy cost effectively from renewable and non-carbon emitting sources.

Down the road NEEWS will help create the infrastructure that will allow us to access these more remote supply sources.

In May I discussed at some length our efforts to create a structure that would allow significant quantities of new renewable, non-carbon emitting power to move south from far northern New England and Canada to meet the energy requirements of all of New England.

We continue to meet with public policy makers and other utilities in both New England and Canada to develop a framework to allow these initiatives to move forward.

These conversations take two paths.

One is to develop a consensus around the economic and environmental value of long-term power arrangements that can provide energy from renewable non-carbon emitting sources to New England consumers.

The other is to identify transmission routes over which we can import power to displace high cost generation.

We believe we are making progress on these initiatives and will continue to update you on that progress.

During its recently concluded legislative session, the New Hampshire Legislature passed Senate Bill 383, which establishes a commission charged with developing a plan to expand the electric transmission system in northern New Hampshire to encourage the construction of new renewable generation in the state.

The commission must finalize its report by December 1, 2008.

We will work closely with New Hampshire officials who see the development of renewable resources as critical to their state's energy future.

Beyond transmission, policymakers in New England continue to create incentives to promote the development of renewable and distributed generation and to better manage and reduce the use of energy.

These incentives create new opportunities for customers and for companies involved in the energy business.

In New Hampshire this spring the Legislature approved a bill that allows regulating utilities to invest in limited amounts of distributed generation on their system or on their customers' premises.

In Connecticut regulators have become more open to allow utilities to sign long-term contracts to meet the energy requirements of our customers.

Massachusetts probably took the most comprehensive steps this year when Governor Patrick signed the Green Communities Act of 2007 on July 2.

Among the bill's provisions were the requirement that 80% RGGI auction proceeds be earmarked for energy efficiency and demand response; the removal of the cap on utility expenditures for energy efficiency and demand response; the ability of utilities to sign long-term contracts for renewable resources, and the ability for utilities to be able to own and operate up to 50 megawatts of solar resource generation.

Additionally, as David will discuss, Massachusetts regulators issued a decision last month that requires all utilities to move forward toward full decoupling.

Interestingly, 2008 is turning out to be not only a year of strong operational and financial results for our Company, it is also a year of change in how the public and policymakers are viewing utilities such as NU.

As in many other parts of the country, customers are asking us not only to provide them with safe and reliable energy delivery; they are asking us to provide solutions to their broader energy issues.

We welcome the opportunities this change provides and we will continue to share with you the progress we will make in this area.

Now let me turn the call over to Lee Olivier.

Thank you, Chuck and good morning.

So far 2008 has been a good ear for in use operational performance and execution of our capital deployment plan.

I will start with operations.

We are meeting our systemwide reliability goals, and we are on or ahead of schedule in all of our major infrastructure projects.

Our annual CapEx program of $1.3 billion is essentially on target with transmission spending being slightly ahead of schedule.

However, distribution spending is slightly behind primarily due to the slowing economy.

We expect our distribution capital expenditures to the end of this year to be about $35 million below our budget.

Turning to generation, our baseload coal and wood generation at PSNH was available 98% of the time when prices in New England were the highest, and we expect to meet our generation capacity back to targets for the year.

In transmission, as Chuck mentioned, we are now projecting completion of all four major southwest Connecticut projects by the first quarter 2009.

Nine to 12 months ahead of the original schedule of December 2009.

We also project that together the four major projects will be less than our original estimated cost of $1.68 billion we've been discussing with you over the past several years.

Here is an overview of the status of those major projects.

The Long Island cable replacement project entered service on July 29th and provides a much more reliable link between Norwalk, Connecticut and Northport, Long Island.

This project was constructed jointly with Long Island Power Authority, and our share of the cost is $72 million.

The only remaining work on this project is to complete cable [duro] on the New York side of the Long Island Sound in September, which will require a brief outage.

Of our remaining two southwest Connecticut projects the Glenbrook cables project between Norwalk and Stamford is now 93% complete and on budget of $223 million.

Most significantly, our Middletown to Norwalk Project is now about 95% complete.

We expect the 45-mile overhead section to be completed and in service by the end of this year.

Construction of a 24-mile underground section should be largely complete late this year.

However, we expect testing to continue beyond the end of 2008.

As I mentioned previously, every month we shave off the in-service date reduces capital capitalized costs by about $4 million.

Assuming this project enters service in early 2009 the cost will be at least $50 million below its $1,050,000,000 budget.

Early completion will provide customers with the benefit of improved reliability and reduced market contingency costs almost one year earlier than we had initially projected.

While at the same time trimming the costs that will be needed supported in transmission rates.

For investors it means that cash flows generated by the line will be fully reflected in our financial statements for nearly all of 2009.

Southwest Connecticut has been a very good story, but it is not the only area of our service territory where we are enhancing our transmission system.

There are dozens of other projects throughout our multistate service territory, that together represent about $200 million or more of transmission spending annually.

In May CL&P completed a comprehensive $47 million upgrade of the Barbour Hill transmission substation in South Windsor, Connecticut, that serves a rapidly growing area northeast of Hartford.

We added new 345kV feeds, installed necessary transformers and other substation equipment and rebuilt the substations 115kV section in time for the peak summer load.

Like Bethel to Norwalk and dozens of other projects, this expanded substation is serving customers and earning a return for investors this summer.

Our last conference call took place just before we provided updated cost estimates for NEEWS.

In mid-May we updated you on that project.

The most significant change was a decision to merge the former Springfield underground cables project into an expanded greater Springfield reliability project.

The greater Springfield reliability project is the largest and most complicated project within the NEEWS family of projects.

It involves building a new 40-mile, 345kV line on existing 115kV right of way from Ludlow, Massachusetts to Bloomfield, Connecticut.

Along the way we need to rebuild much of the 115kV system in Massachusetts on the same right of way, construct two new switching stations and upgrade a number of substations.

It represents a $714 million of the $1.49 billion we currently expect to spend on the NEEWS family of projects.

In late June we began meeting with residents and other interested parties in three of the Connecticut towns potentially affected by the greater Springfield reliability project, and we began the same process two weeks ago in Massachusetts.

Next month we expect to receive endorsements from the ISO New England reliability committee for the greater Springfield reliability project and the other two 345kV projects that comprise the bulk of NEEWS, with ISO New England's formal approval by year's end.

One of the two others is the interstate reliability project, which will be completed in coordination with National Grid, CL&P's section will connect from Lebanon, Connecticut to the Rhode Island border, from which National Grid's section will extend from the Rhode Island border to Millbury, Massachusetts.

The third major part of NEEWS is the central Connecticut reliability project, which will connect from Bloomfield, Connecticut to Watertown, Connecticut.

We are proposing to build all projects overhead and within existing rights of way.

This fall we plan to file for citing approval of the greater Springfield reliability project with both the Connecticut Siting Council and the Massachusetts Energies Facilities siting board.

Municipal consultations are expected to begin later this month in some of the 11 Connecticut towns in Northeast Connecticut affected by the interstate reliability project with an eye on filing in late 2008 for Siting Council approval.

We will seek Siting Council approval for the central Connecticut reliability project next year.

We expect to complete construction of the NEEWS projects by the end of 2013 assuming our siting applications are approved in a timely fashion, and we are not delayed by appeals.

We would expect to begin incurring major capital expenditures in late 2010 and for the peak construction period to be 2011 and 2012.

I will remind you that our $1.49 billion estimate assumes that the projects are all built overhead and consistent with the configurations we will present to the citing authorities.

If we are required to underground portions of the project, of course, costs will rise considerably.

Turning to generation, I am sure you noticed that today we have updated our cost estimate for installing the clean-air project, a wet scrubber for our PSNH Merrimack station in Bow, New Hampshire.

Recall that Merrimack is a dual unit, 430 megawatt base load plant that provides some of the lowest cost power produced in New England.

The $457 million cost of the clean-air project reflects firm bids for the major project segments we received this year and incorporates significant increases and a number of costs over the past several years including increases in the cost of materials, labor and engineering.

We expect to begin construction of the scrubber in 2009 and complete it well before the legislative deadline of July 1, 2013 by reducing the mercury emissions of Merrimack.

Recall that PSNH is 1150 megawatts of generation operates under the traditional cost of service rate base model.

Since it is largely depreciated and runs primarily on a combination of coal, wood and water, that generation portfolio is the primary reason PSNH rates are significantly below the New England average.

The clean-air project has a number of benefits.

First, it will reduce the units sulfur emissions by more than 90% and mercury emissions by 85%.

The project will also allow PSNH to avoid the purchase of 30,000 sulfur dioxide credits required to be purchased annually.

Second, it will maintain a valuable source of below market energy for PSNH and provide it with a valuable hedge against a run-up in capacity in energy prices.

Once the clean-air project is complete, our Merrimack Station will be one of the cleanest coal-fired generating plants in America and will continue to provide our customers with energy below the projected market price and lessen the region's dependency on natural gas.

I would also add that Merrimack previously installed a selective catalytic reduction system to reduce NOx and supplemental precipitators to minimize fine particle matter.

The clean-air project not only will help the environment and New Hampshire's energy diversity, it represents a sound investment on behalf of our customers.

The 2006 legislation that requires us to install the scrubber also requires New Hampshire regulators to allow us to earn our generation rate base return on equity that is currently 9.81%.

We look forward to moving ahead with this project this year.

Now let me turn the call over to David McHale.

Thank you, Lee.

And thank you, everyone, for joining us.

There are two very positive items I want to discuss this morning.

First financially we had a very strong second quarter as well as a very strong second-half 2008.

Second, because of those results and our confident about the second half of the year we raised consolidated earnings guidance for 2008 by $0.15 per share on the low end of the range and $0.05 per share on the high end, resulting in a new range of $1.80 to $1.95 a share.

That excludes the first-quarter Con Ed related litigation charge.

I will discuss the components of our revised guidance in a moment.

Turning to our financial results as shown in slide four, we earned $57.8 million or $0.37 a share in the second quarter of '08, up 19.2% from the $48.5 million we earned in the second quarter of 2007.

In the first half of the year as shown on slide five, earnings excluding the first quarter after-tax litigation charge of $29.8 million were $146 million or $0.94 a share up, 18.1% from the $123 million or $0.80 per share we earned last year.

The primary driver for the results was our transmission segment where we earned in the second quarter $35.2 million, up 66.8% from the $21.1 million we earned last year.

For the first half of the year transmission earnings were $67.7 million, up 83% from the $37 million we earned in the first six months of 2007.

The driver for transmission earnings growth was the dramatically increased investment in our facilities, particularly in southwest Connecticut.

Our transmission rate base including 50% of our capital expenditures to date on the three newest lines in southwest Connecticut totaled $1.77 billion at the end of June compared with $1.18 billion a year earlier.

We also benefited in the first half of the year from an order on rehearing that FERC issued in March on the return on equity levels authorized New England transmission owners.

That order, which was retroactive to 2005 generated $4 million of incremental transmission earning in the first half of this year.

Last month FERC approved a 100 basis point incentive for the equity returns on the entire Middletown Norwalk project and another 46 basis points for the underground portion.

This means we will earn an equity return of 12.64% on the overhead section of Middletown-Norwalk and a 13.1% return on the underground portion.

The 46 basis point add are on the underground portion will result in about $1 million of additional earnings once all the advanced technology plant is in service.

Also I should note that within a few months we will be filing an application with FERC seeking incentives for our NEEWS project.

We expect to provide you with more detail on that application at the EEI Financial Conference in November.

During this past quarter CL&P represented more than 80% of all end-use transmission earnings since Connecticut has been the focus of our construction efforts in recent years.

While that is not surprising given our heavy investment in southwest Connecticut, we expect that ratio to change over the next several years as additional large projects are constructed in New Hampshire and Massachusetts.

As these new projects are built we continue to expect that our transmission segment will generate more than 50% of our consolidated net income by 2012.

Now turning to the distribution side of the business our four distribution segments earned $25.6 million in the second quarter of 08, up 9.4% from the same period of 07.

In the first half of 2008 those segments earned $79.4 million up 10.9% from the first half of last year.

In terms of the individual companies, the Connecticut Light Power Company distribution segment earned $14.8 million in the second quarter of 08 and $33.7 million in the first half of 08 compared with earnings of $7 million in the second quarter 2007 and $27.6 million in the first half of 07.

Those improved results occurred despite a 5.8% year-to-year decline in the second quarter kilowatt hour sales and a 4% decline in the first half sales.

The primary driver behind CL&P's improved performance was the $77.8 million annualized distribution rate increase that was effective February 1, 08.

That has been partially offset by higher operating costs, some of which reflect enhanced maintenance programs approved in the rate case as well as higher amortization expense.

CL&P's distribution regulatory ROE was 8.2% for the 12 months ended June 30, and we continue to expect the Company to earn around 8% for 2008.

PSNH's distribution and generation segment earned $10.1 million in the second quarter of 2008, down from $12.6 million in the same period of 07.

And $21.6 million in the first half of 08, up from $20.7 million in the first half of 2007.

PSNH benefited from distribution rate increases effective on July 1, 07 and January 1 of 2008 but those increases have been somewhat offset by higher operating costs and the absence of a one-time $2.7 million after-tax benefit recorded in the second half of 2007 after PSNH's rate settlement was approved.

That item reflected the recoopment of transmission expenses that had been expensed in 2006.

PSNH's combined distribution in generation regulatory ROE was 8.8% over the 12 months ended June 30, 2008 and we expect to end the year around 9%.

Western Mass Electric earned $1.7 million in the second quarter of 08 and $6.5 million in the first half of the year compared with $3.5 million in the second quarter of 07 and $9.4 million in the first half of 07.

A $3 million distribution rate increase that was effective January 1, 2008 was not enough to offset a number of items including a $2.9 million decline in year-to-date retail sales, a $1 million second-quarter after-tax charge from a regulatory decision concerning carrying charges on transition costs as well as storm expense and higher uncollectibles.

The $1 million charge relates to a recent DPU decision regarding the carrying cost of regulatory over recoveries that are eventually refunded to customers.

The DPU ordered us to use a higher ROE in calculating the carrying costs going back to 2005, which in turn created a larger refund.

Western Mass's regulatory ROE for the 12 months ended June 30, 2008 was 8.2%, about 9% excluding the regulatory charge and we expect to end the year with a regulatory ROE of about 8% or around 8.5% excluding the regulatory charge.

Yankee Gas lost $1 million in the second-quarter of 08 and earned $17.6 million in the first half of 2008 compared with earnings of $300,000 in the second quarter of 2007, $13.9 million in the first half of 2007.

Yankees' dramatic year-to-date improvement is due to a rate increase that took effect July 1, 2007 but that was more than offset in the second quarter by higher O&M and a negative outcome to a purchase gas docket that related to adjustments made several years ago to unbilled revenues, specifically the DPUC disallowed $5.8 million of the unbilled adjustments from the 2003 PGA year and ordered Yankee to refund that $5.8 million to customers.

This resulted in a $3.5 million after-tax charge in the second quarter.

Including that charge, Yankees' regulatory ROE for the 12 months ended June 30, 2008 was 9.1%, about 10% excluding the charge and we expect to end the year around 8%, again including that charge or around 9% excluding the regulatory charge.

In terms of sales, overall our electric retail sales were down about 4.5% in the second quarter of 08 compared with 2007; on a weather adjusted basis they were down 4.1%.

For the first half of the year as shown in slide six, they were down 3.1% versus the same period of 2007 and down 2.6% on a weather adjusted basis.

It is worth noting importantly that changes in our sales do not impact our bottom line nearly as much as they once did.

In all three electric jurisdictions the non distribution revenues are tracked and reconciled to actual costs, so sales variations impact our earnings only to the extent that we have over or under recoveries and improved carrying costs.

With respect to distribution revenues, the majority of the approximately $0.03 per kilowatt hour distribution charge we have in each of our states is recovered through fixed rate charges, such as the monthly customer and demand charge.

For CL&P this reflects the fact that in their last rate case the DPUC began implementation of rate decoupling via increased fixed costs recovery and rate design and will continue to enhance fixed cost recovery in future rate cases consistent with state legislative policy.

Based on today's rates, CL&P recovers nearly 65% of its revenue through non-usage components.

You will find it is a similar number for Western Mass Electric, about 60% for PSNH and about 55% for Yankee if the DPUC adopts our latest rate design proposal.

In our view declines in sales reflect much of the same economic influences that are being experienced throughout the region and nationally.

While there are pockets of the economy that exhibit steady results or even growth, it is fair to say that the direct and indirect impacts of increases in energy costs generally outweigh the positive indicators at this time.

Businesses and consumers are responding to the increasing costs in various ways including installing distributed generation, utilizing our conservation and load management programs and taking steps on their own to both conserve on their usage of electricity and reduce usage in peak hours.

With respect to sales by customer class the biggest decline is in industrial sales which are down 8.7% this year.

For a number of years we have been experiencing a decline in industrial sales and expect to see the trend continue.

We believe the bulk of the sales decline so far this year is due to two things.

The first one being customer reaction to rising prices, not only of electricity but also oil, natural gas, gasoline and other consumer goods.

The second reason for the decline is an increase in large customer owned cogeneration and distributed generation.

For distributed generation in Connecticut, public act 0501 authorizes CL&P to recover all lost distribution revenue associated with qualifying projects.

This is accomplished via the federally mandated congestion charge as approved by the DPUC.

It is also worth noting that for CL&P 99% of the industrial revenue is collected through non-energy charges.

That figure is 90% for Western Mass Electric and about two thirds for PSNH.

Residential sales were down 3.5% or 2.6% on a weather normalized basis for the first six months of 2008.

Feedback from our customers indicate they are proactively taking steps to reduce their usage in response to the high cost of electricity, concerns about the economy and their own financial situation and for environmental reasons.

At the same time we continue to see growth from the prior year and number of residential customers which helps to offset some of the decline in the average use for residential customer.

On commercial sales they were also down from the first six months of this year, 0.6% on an actual basis to 0.4% weather normalized.

Some of this decline is attributable to certain generators who previously took station service from CL&P as retail commercial customers, but this year are served directly by ISO New England as wholesale customers.

These station service customers are interconnected to transmission voltage and contribute no distribution revenue so the loss of station service retail load has no earnings impact.

Unlike our electric sales Yankee Gas [firm] sales posted an increase in the second quarter, up 2.4% on an actual basis and up 7.4% on a weather adjusted basis.

On the actual basis all of that increase came in the industrial sector where sales were up 10.6% in the quarter and 5.2% year-to-date.

Approximately half of the industrial growth is due to the addition of customer owned gas-fired distributed generation.

We believe the highly favorable pricing comparison today of natural gas versus heating oil is contributing to industrial growth, as well.

Now let me turn to the collection of our customer receivables.

Consistent with our sales results over the first six months of the year our uncollectible expense has also been influenced by the economy.

Consistent with trend over the last two to three years our write off as a percent of revenues have increased this year for all of our distribution companies.

Most notably at Western Mass Electric.

As a result, our uncollectible expense in the second-quarter was somewhat greater than we expected, and our projected expense for the year is somewhat higher, as well.

Like our sales, it is important to note that changes to our uncollectible expense do not impact our bottom line on a dollar for dollar basis.

For example, a portion of the uncollectible expense for each of the electric distribution companies is allocated to their respective energy supply rate and recovered as a tracked expense.

For CL&P and Yankee Gas bad debt write-off attributable to their hardship customers are tracked and recovered on a dollar for dollar basis as authorized by statute.

PSNH and Western Mass offer discounts to limited income customers, and these amounts are recovered.

Nonetheless the recent increase in our uncollectible expense is real, and it is one of the factors along with sales, capital investment and O&M expenses that we continue to watch closely as we consider the timing and magnitude of our next distribution rate cases.

We do not expect any rate filings in 2008.

Although we continue to evaluate our rate case strategy at this time based on earnings cost and sales trend, it is probable you will see rate cases filed by CL&P and PSNH in midyear -- probably midyear 2009.

We are hopeful that Yankee Gas can avoid a rate case filing until beyond 2009.

It is also probable Western Mass Electric will file in 2009.

On July 16 the Massachusetts DPU ordered all utilities in the state to file for full decoupling of unit sales from distribution revenues in their next rate case.

Currently we are in the second year of a two-year settlement approved by regulators at the end of 06; that settlement allowed us to raise distribution rates by $1 million in 2007 and another $3 million this year.

And also allowed us to create tracking mechanisms for certain costs including pensions and post-retirement medical benefits.

More specifically with regard to the recent ruling the DPU will honor existing settlements but wants all utilities to go through a contested case by 2012 and order utilities to notify DPU by September 2, 2008 when they expect to file that rate case.

Therefore, Western Mass will not settle its next case, so in accordance with this order we will submit a rate case to the department and proceed with a full evidentiary hearing process.

In addition to decoupling, which will be based on a fixed amount of revenue by customer by class, the filing can include aspects of performance-based rate making to include inflation and capital spending if warranted.

And may include cost tracking mechanisms if the company can demonstrate that such costs are large, volatile and out of their control.

The ruling also allows for recovery of lost base revenues as a result of incremental conservation and load management spending.

Now from rate making let me turn to financing.

In the second quarter we completed a vast majority of the external financings we expect to undertake in 2008.

CL&P sold $300 million of 10-year first mortgage bonds and NU sold $250 million of five-year senior notes.

Coincidentally the coupon in both series was 5.65%; also PSNH sold $110 million of 10-year first mortgage bonds of 6%.

We are encouraged to see a number of new investors buy a significant share of those issuances and think that bodes well for our debt issuances in future years.

Two other financings are on the calendar for this year including a $100 million private placement first mortgage bond at Yankee Gas, Connecticut regulators approved Yankees' issuance request last week.

You may have noticed that also last week Moody's raised its outlook on Yankee Gas to stable from negative, primarily based on last year's rate settlement.

We think that bodes well for Yankee's upcoming debt issuance.

At this time all credit ratings on the NU system are stable.

Additionally CL&P has a $62 million tax exempt first mortgage bond that has a fixed interest rate for a five-year period that ends October 1.

We are currently assessing our options for remarketing that tax-exempt bond.

At the end of June total debt represented about 58% of NU's consolidated total capitalization.

You may recall that we said that when total debt approaches 60% we will begin to look at the timing of an equity issuance.

We expect to reach 60% by the end of 2008 so we continue to expect to issue equity within the next year to maintain our balance sheet position to ensure successful future financings related to our capital investment program.

Even with the issuance of NU equity we expect our investments to be accretive to EPS, position us for attractive long-term earnings growth.

Cash flows from operations totaled $270 million in the first half of 08 approximately $165 million after repayment of rate reduction bonds.

We continue to project cash flows of between $450 million and $500 million after rate reduction bond payment.

The improvement in the second half will come from a number of factors including the fact that we paid $49.5 million in the first quarter to settle litigation with Con Ed and will derive about $19 million of tax benefits from that payment in the second half of this year.

Additionally, net regulatory refunds and under recoveries totaled $136 million in the first half of this year and we expect that figure to be much smaller in the second half.

Now before turning this call back to Jeff to start Q&A I want to discuss our announcement Friday evening in which we raised 2008 guidance.

Slide seven contains the details, but I will start with transmission.

Earlier I noted the positive impact of recent FERC decisions on our 2008 transmission earnings, we also benefited from strong execution of our capital program that Lee mentioned.

As a result of these factors we raised 2008 EPS guidance from $0.75 to $0.85 per share to between $0.85 and $0.90 per share.

We also reviewed our parent and other affiliate guidance in light of the successful NU unsecured debt financing in June and all in rates lower than what we had imputed into our guidance.

Because of that factor and lower short-term debt interest expense and lower OM expenses, we amended our guidance to a loss of $0.10 per share excluding the $0.19 litigation settlement charge, better than the previous projected loss of $0.10 to $0.15 per share.

As a competitive businesses we have earned $0.03 per share so far this year and continue to be successful managing our wholesale energy position.

So we are raising our estimate this year from breakeven to between breakeven and $0.05 per share.

Finally, the recent Yankee Gas and Western Mass regulatory decisions and lower than projected sales in the first half of 2008 will have some impact on our distribution business.

As a result we lowered the upper end of our distribution and generation earnings range to $1.10 per share from $1.15 per share, but we are maintaining the lower end at $1.05 per share.

When we add up all these changes we are now projecting 08 earnings between $1.80 and $1.95 per share excluding the first quarter litigation charge.

As we've done in the past we expect to provide you with 2009 earnings guidance; in 2009 to 2013 capital expenditure and rate base projection including the new New Hampshire clean-air project at the EEI conference in November.

And lastly, just as a reminder our third-quarter dividend will increase 6.25%, a $0.05 per share increase in the annualized rate from $0.80 to $0.85 a share.

It was the seventh consecutive year we raised the annualized rate by $0.05 per share.

Thank you very much for your time, and now we will turn the call back to Jeff.

And I am going to turn the call back to Christine who can tell you how to enter your questions.

(OPERATOR INSTRUCTIONS)

Thank you.

Our first question today is from Anthony Crowdell from Jeffries.

Anthony.

Good morning.

Just wanted to know if you could talk a little about the blended ROE in the transmission business and what do you guys see as the blended ROE when you look at all the projects together at the end of 08 and also the end of 09?

Let me address that.

I think in the past we've talked about 12%, moving up to 12.1% maybe a little higher over the life of our five-year numbers that we've shared with you.

I think we've gotten at least one constructive regulatory order maybe a couple since that time, including the 50 basis point add for our technology associated with MN.

I don't think it is enough to move that number dramatically at this point, so we'd see still in that 12%, 12.1%, 12.2%.

And that is subject to the incentive filing that will take place later this year for our NEEWS project.

So we will kind of keep that number in place for the time being.

We will update you on EEI.

Any update will be driven around our views on the NEEWS incentives.

Great.

Thank you.

Next question is from Ashar Khan from S.A.C.

Good morning.

Dave, just going back could you just tell us what the transmission CapEx is going to end up in 08 and what it is going to be in 09?

Based on the comments and I guess you said you are running faster, I am trying to understand how CapEx is shifting around in this current or next year.

Sure.

Let me have Lee kind of tackle that one for you.

If we look out, if we look out 08 and we will spend about $700 million in 08 and in 09 about $350 million in 09.

That's total?

Total in transmission.

I had it down as $506 million in a previous slide, so it is going to be lower now by $150 million?

I think when you say $506 million you are referring to the projection that we gave at EEI in November of 2007, when we had the earlier schedule for MN.

Is that correct?

That is probably correct.

Okay.

That is what I have.

That is correct.

But that has been amended, of course?

That's correct.

And at EEI we will give you a new schedule that goes out to 2013.

Okay.

Thank you.

Thanks a lot.

Next question is from Jonathan Arnold from Merrill Lynch.

Good morning.

Just following up on the discussion on sales that David just made, I am wondering if you could be a little more specific about how much in the first half did slower than expected sales have actually impacted earnings, say realize there are several ways in which you would shield it.

And secondly what kind of assumptions around sales to be made for the second half in the distribution guidance where you are not changing it too much, and the earnings impact of that assumption.

Let me kind of tackle that second piece only because with respect to your first question we really don't have that level of specificity that we share in that detail around our disclosures necessarily.

But let me tell you about what our thoughts are for going into guidance.

And obviously we lowered the top piece of that guidance from 115 to 110 driven on our view of the sales and even though I think there is a certain elasticity to the sales, I hope you've gathered from our rate making mechanism that we are protected from a revenue recovery.

That said, right now we see that when you weather normalized CL&P sales and think about what is going on going forward, we probably continue to see that type of performance that is kind of underperforming what we had originally thought going into the year in that same frame.

So I think weather normalized we are down about 3.5% year.

We would expect to see that trend going forward.

I think one of the things that we study just from a behavioral standpoint is whether later this summer, this month as consumers experience really warm weather, whether they will really turn down their air-conditioning when it gets hot for a number of consecutive days.

We've done some recent polling of our residential customers and one thing that they tell us is they are being more proactive and watching their thermostats more closely on both warm days and on cool days.

So we will see if that persists, but I think in the guidance we see this type of sales experience going forward.

I think we see similar results for PSNH, not a lot of strength and their sales environment is better.

It is about flat on a weather normalized basis.

If there is some erosion, further erosion going forward we continue to be concerned about our western Mass jurisdiction primarily because from an economic standpoint and from an affluent standpoint they are the weaker of our customer base and I think their response may be a little bit more negative going forward and we do also see some firming at Yankee Gas.

So the weak spots Massachusetts; I think you can see, expect similar trends CL&P and PSNH that we've seen so far.

Thank you.

Maurice May.

Good morning, folks.

Congratulations on a good quarter.

A question on the Massachusetts energy regulation that was just signed by the governor last month.

I am unclear as to the utility recovery of the possible cost of 50 million -- I'm sorry -- 50 megawatts of solar.

Is it going to be rate based; is it going to be owned and leased?

How are utilities going to recover there?

The legislation really leaves it up to each utility to be able to basically file a plan, file a plan and how much photovoltaic they would want to build and what is the recovery mechanism.

So it is not determined whether that goes into essentially distribution rate base, but you create a separate rate base with a different return on equity associated with it.

So that is something that we are looking at now.

Okay, and that's 50 megawatts for the state.

So what would WMECO's share of that be?

I guess it would be a small share.

That is actually 50 megawatts per utility.

Oh really?

Okay.

So each utility could build up to 50 megawatts.

Okay, and what is your best estimate for a kilowatt of solar these days?

$5,000 still a good number?

It is around $6000, is the last number that I saw without any other subsidies directly from some other source.

Okay, good.

And how would this be instituted?

Would customers request solar on their roofs, and would the utility then install it and maintain it and essentially put it into the entire rate base?

Yes, we are putting together a plan that addresses that, but essentially customers could request it.

And a customer would get a kind of lease fee for allowing us to install solar on their facility.

We could install solar on our own facilities as an example, and connect it to the grid.

So there are a number of ways to do that.

Would it possibly be socialized upon the entire rate base?

Across the state?

Well, across the, let's say, the service territory of each utility.

It would be socialized across the service territory of each utility.

Okay, great.

Thank you, Lee.

Paul Patterson from Glenrock.

Just a little bit more on the rate case expectations in 2009.

What kind of ROE -- I guess in the middle of 2009, your expectation is that your ROEs will be at that point an appropriate point to go in and get relief.

Is that -- could you give us a little bit of a flavor for the range in ROE that you think that might, just generally speaking obviously; nothing that specific, but just in general what will happen to the ROEs in 2009?

Well, I think right now if our strategy stays the course here and we are filing in 2009 -- and I mentioned that we are hopeful that the Yankee may not be in the hopper quite yet.

But for the electric companies, that puts 2008 as the test year.

And if you look at a test year in which -- and you heard me rattle off the ROEs -- you are kind of mid 8s in some cases, depending on how you sort of adjust for the numbers, and there is no further rate relief for 2009, although in some cases like CL&P we've got a rate increase coming up (inaudible).

You've got continued pressure on these returns.

That is the bad news.

So you are going to go into these cases with a test year that is weak and then a filing year in which the trends are getting increasingly negative.

I think that is the backdrop by which you have this dialogue, as well as for CL&P in particular, still very, very meaningful capital expenditures going forward.

We know the commission has been supportive of the investments in the aging infrastructure.

So you will have a dialogue around the type of investment, the degree of investment, how much maintenance CapEx you want to do on this system.

That too is the backdrop for our cases going forward.

With Connecticut Light & Power, I got the ROEs that you guys were generally expecting for PSNH and WMECO.

What is it for Connecticut Light and Power again?

I'm sorry, I just got distracted momentarily.

For the Connecticut Light and Power company?

In 2008 we said we will be in about the 8% range.

We haven't given any specificity yet for 2009, haven't given earnings guidance around 2009.

That is something we will talk about a little bit later in the year.

And the test year is going to be 2008; I guess the question comes up why not go in a little bit earlier?

Because it is going to take some time to go through the process and what have you.

Do you follow me as opposed to waiting until the middle of 2009?

I do follow you, and I think that is something that we are studying pretty carefully given this sort of climate that we are in but it is definitely not out of the question, Paul.

Okay.

And then the equity issuance, I didn't get the size of that that you were sort of expecting to do I guess near the end of 2008.

In today's remarks I didn't mention a size.

In the past we had talked about is given the projections around rate base, CapEx and the like, given our leverage range of 60%, we probably have to issue about $0.5 billion over the next five years, and we said in the past half of that could come in 2009, maybe half a couple years later.

That, too, sort of subject to update when we consolidate our new strategic view later this fall, but those numbers aren't out of the question by any means.

If you had $250 million in your models for 2009, I think you're going to be in a lot of company with where I think the Street is right now.

Okay, no change.

Okay then.

Just finally on the distributed generation side there, which was I guess one of the big drivers for the lower industrial usage, where do you see the -- I mean is pretty much the low hanging fruit in that area already taken by the industrial customers, or do you see -- where do you see the trend in that going, I guess and I guess it is mostly Connecticut with the law there.

Is that correct?

Yes, Paul, it is and mostly in Connecticut although as Chuck intimated, there is the opportunity for more distributed generation in New Hampshire.

With the recent legislation a distribution company can build up to 6% of its peak demand load, and that would be over 115 megawatts, 120 megawatts for instance for PSNH in New Hampshire.

So we expect more distributed generation in New Hampshire, we expect that we will be part of that and build that.

There is a heavy emphasis on that legislation in renewable.

So it could be photovoltaic or wind in New Hampshire, of course a very good area for wind power.

In terms of Connecticut, there are still some more opportunity there probably the biggest one recently was the Kimberly-Clark facility that went commercial in terms of their distributed generation this year, fairly large load.

A lot of the other major players like UTC are already on essentially in-house generation, but there is a number of other smaller application or high-rise buildings and industrial parks that still remain inside of the state.

Any perspective as how this with the load management program, and the conservation that you are seeing, there is also I guess the peaking generation that I forgot what the -- I apologize if I missed this -- where that is going in that the DPUC what that might do with the demand and supply balance in the wholesale market?

I think what all of our studies in the IRP that was put together by us and United Illuminating and is now currently being reviewed by the Connecticut Energy Advisory Board basically tells you that there is no more need for additional baseload generation.

So if you factor in the RFP that the DPUC put out a couple years ago, which was for about 800 megawatts and this other one which is for around 600 megawatts for peaking generation; and if you factor in no retirements of existing plants -- and Connecticut has a lot of older plants 40 years old or so that really essentially don't run.

So most of their revenues are created through the fluid capacity market; you don't need baseload, you won't need any more peaking plants and kind of the wildcard is what happens to those existing plants that are old and sit idle for the most part?

Of course the other part of it is when NEEWS is built, NEEWS brings in additional transfer of capacity into the state.

It adds another 1200, 1300 megawatts of transfer of capacity to bring power in from places like New Hampshire and Massachusetts.

So build out of baseload generation in the long-term will probably not be strong inside of Connecticut.

Thanks a lot.

Our next question is from Steve Fleishman from Catapult.

Hi, gentlemen.

Couple quick questions.

First on the transmission guidance change could you maybe give some sense how much of the change is related to the higher ROE, versus essentially the higher rate base and completion of the spend earlier than expected?

I think clearly most of the change in that guidance is driven by the FERC ROE decision that retroactively kind of reached back and gave us more value.

From past years as well as more value in 2008.

So that was probably $0.03 of it, sort of think about it that way.

The accelerated spending this year and the success of having bring project nearer to completion along with a number of other items, smaller items is the balance of it.

Okay, but that was $0.03 out of $0.10 so it is probably more the higher spend this year.

It is accelerating.

It is really what we are doing around Middletown Norwalk, putting that in position to come into service very early in 2009.

My second question is just I know Chuck at the beginning mentioned a little bit about the NEEWS project and the initiatives with Canada, Northern New England.

Just do you think by the end of this year or maybe by your EEI meetings we will have better definition on your potential opportunities there and maybe even some kind of contract arrangement?

I would hope that by we get to that point in time in the year, let's say November EEI we've gotten some more definition around what might be possible and can have a more fulsome discussion around that.

So that is a pretty good timeframe.

Our next question is from Ted Durbin from Goldman Sachs.

All my questions have been asked.

Thanks.

We don't have anymore questions.

If you have anymore or you want to follow up please give us a call later this morning or this afternoon.

Just want to thank everybody for joining us.

Take care, and have a good day.

This concludes today's conference.

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