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Central Vermont Public Services Corp. (NYSE:CV)

Q3 2008 Earnings Call

November 5, 2008 2:00 pm ET

Executives

Robert Young - President and Chief Executive Officer

Pamela Keefe - Vice President, Chief Financial Officer and Treasure

Ann Warrell - Investor Relations Specialist

Analysts

Paul Ridzon - KeyBanc Capital

Danielle Seitz - Maxcor Financial Group

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2008 Central Vermont Public Service Earnings Conference Call. My name is Erica and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer toward the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Ms. Ann Warrell, Investor Relations Specialist. Please proceed.

Ann Warrell

Thanks for joining us today for the CVPS 2008 third quarter earnings teleconference. As Erica said, I am Ann Warrell and I am the Investor Relations Specialist at CV. Before we begun I would like to point out to you that we maybe discussing certain subject related to our third quarter earnings that may contain forward-looking statements.

I would caution you that actual results could differ materially from those expressed in such forward-looking statements and I refer you to the Safe Harbor language that is contained in the third quarter earnings press release that we issued this morning. This release appears on the investor relations section of our website at www.cvps.com along with slides that will be referred to throughout today’s call.

Also during the call today we will be discussing earnings per share, which in all instances refers to diluted shares of common stock. Leading today’s discussion are CVPS President and Chief Executive Officer, Bob Young and Vice President, Chief Financial Officer, and Treasurer, Pam Keefe. Bob will provide an overview of the company’s earnings and an update on corporate and strategic developments. Pam will then describe the third quarter financial results in detail. We will leave time to answer your questions before the conclusion of the call.

Now I would like to turn things over to Bob.

Bob Young

Thank you, Ann and welcome everyone. Today we reported 2008 third quarter earnings of $6.5 million or $0.61 per share of common stock. This compares to 2007 third quarter earnings of $4.3 million or $0.41 per share. For the first nine months of 2008, CVPS reported earnings of $16.4 million or $1.55 per share, up from $10.9 million or $0.99 per share for the same period in 2007.

These results were driven primarily by a higher than anticipated resale revenues due to unusually high market prices and an increase in earnings from our equity investment in VELCO. In a few minutes, Pam will describe our financial performance in detail, but before we get to that, I would like to tell you more about the long awaited Public Service Board approval of our alternative regulation plan, which is described on slide two.

The Board’s decision was issued on September 30, and largely consists of the major components we have discussed since we originally filed the plan in August 2007. This is a positive regulatory outcome and we look forward to working onto this new framework. The plan is the central piece of our continuing efforts to improve our financial position. It is designed to provide more timely power and non-power cost recovery through quarterly power cost adjustments and an annual base rate adjustment.

Earning Sharing mechanism will provide incentives for cost containment and more certainty around earnings results. However, the plans implementation schedule for 2009 is complicated, so I will go through the highlights now to give you a better idea of when to expect certain actions and adjustments under the plan.

As you may recall, the plan will be effective through 2011. October 31, CVPS submitted its first annual base rate filing to Public Service Board. This is similar to a traditional rate case cost of service filing. Power cost adjustment mechanism and Earnings Sharing mechanism will become effective as of January 1.

Our first power cost adjustment will be made on July 1, based on first quarter 2009 results. The first earnings sharing mechanism will be applied in July 2010, based upon 2009 annual results. Non-power cost will be adjusted in each of our annual base rate filings. For 2009, projected non-power costs are incorporated and the base rate filing we made on October 31.

As part of the Board’s decision, there will be no cap on non-power costs in 2009, but the level of non-power costs approved for 2009 will provide the basis for cost caps for 2010, and 2011.

In the base rate filing we made last week, we are seeking a rate increase of one third of 1%, or $940,000 on an annual basis, which is very modest compared to other utilities requested increases in the northeast. We have proposed this change take effect January 1. However, these new rates may not be implemented at that time if the Board decides to suspend and investigate our base rate request. That decision will most likely be made within a couple of weeks.

Overall, we are very pleased with the Public Service Board’s decision and believe that the alternative regulation plan will lower our risk exposure to power cost variability. Although our customers who have to adjust to the quarterly power cost and annual base rate true ups, we believe the plan is also in their best interest because it gives them timelier price signals and provides incentives to CVPS to contain costs.

The reduced risk exposure to the power market price variability is viewed positively by standard enforce and will help improve our credit metrics as we seek to regain an investment grade credit rate. We are making solid progress in other areas as well.

As shown on slide three, the business process review we discussed last quarter is concluded. The project consultant’s findings present a positive view of the company. The report dated October 13 includes information on 11 specific areas of focus, initially agreed upon, and a few additional areas they felt warranted examination as well.

The consultant found that many of CVPS’s business processes ranging from vehicle leasing to compensation are appropriate for a company like ours and many of their recommendations are to simply continue the good work we are already doing.

The report includes 51 recommendations that will help us continue to work smarter and more efficiently in keeping with our continuous improvement philosophy. We believe that we will be able to accept and implement virtually all of their recommendations.

Turning to power supply matters, negotiations are continuing with Vermont Yankee and Hydro-Quebec to develop new long-term contracts. We are making progress in our discussions with Hydro-Quebec, but we no longer expect to haven an agreement completed by year-end. Most likely we will reach an agreement in 2009.

Time is on our side, since our current contract with Hydro-Quebec does not expire until 2016. The rational behind early negotiations is to provide options to Vermont utilities should Vermont Yankee field to be re-licensed.

Given that both parties are interested in crafting the best possible long-term contract, we are proceeding carefully and we are not concerned about this minor delay. Discussions with Entergy are also continuing, but we have not yet reached an agreement. We have learned Entergy plans propose a standard offer contract by the end of 2008, nevertheless our talks continue Entergy to develop a contract specific to our company that addresses our customer’s needs.

In the meantime, the Public Service Board held a status conference in October on its schedule for Vermont Yankee’s license reauthorization. A preliminary decision in their case is expected in late 2009. It is somewhat unclear at this time whether the Vermont legislature to will address the planned re-licensing during the 2009 legislative session as originally expected.

Legislative priorities will be outlined with the new legislature convenes in January. As we have discussed in the past, we are planning to diversify our power portfolio which is now heavily weighted towards Vermont Yankee and Hydro-Quebec. In the next couple of weeks we will issue a request for proposal jointly with Green Mountain Power and Vermont Electric Cooperative for additional long-term power contracts from domestic and Canadian power resources.

We will cast a wide net, seeking all types of power sources. Some parties have already indicated their interest in bidding. We plan to evaluate responses early next year for decisions in the spring. We remain open to the possibility of joint and individual contracts, the number of contracts we pursue, their sources and duration. The idea is to see what is available in the marketplace and negotiate competitive contracts that are in the best interest of our customers in terms of cost, reliability and environmental impact.

Our other long-term plans involve future capital investments in our electric system infrastructure and VELCO. This strategy is expected to build rate-base at an accelerated pace, over 10% annually on average over the next five years and to help to increase earnings and shareholder value. An updated projection including an estimate for spending in 2013 appears on slide four.

Our plan spending of $41 million for 2008 remains on target including $19 million for generation, transmission and distribution, $11 million for our Southern Loop Project among other items. This plan is outline on slide five.

Construction of a new substation and installation of synchronous condensers, which are part of the Southern Loop Project are well underway and should be completed in early 2009. CVPS’s smart power is also part of our future capital plans, accounting for some $40 million in capital spending over the next four years to deploy an automated meter infrastructure.

This will be the single largest capital project in the company’s history and is intended to improve management of our electric system, reduce operating costs and enhance customer service over the long-term. The capital investment will fund the purchase and installation meters, telecommunication and data management equipment that will be the backbone of smart power.

Our plans for additional equity investments in VELCO remain on track. We anticipate making up to a $6 million equity investment in VELCO before the end of 2008 and believe we will contribute approximately $21 million each year from 2009 to 2011.

Through the end of September, our financial performance has been strong and we are making real headway in our strategic plan. As we look toward the end of the year and beyond, we will continue to follow our stated strategy to maintain superior customer service and reliability; improve our financial position and work on future energy planning initiatives.

At this point, I would like to turn the presentation over to Pam, who will discuss our financial results in depth. Pam.

Pam Keefe

Thank, Bob. For an overview of the third quarter earnings please refer to slide six. CVPS’s third quarter 2008 net income increased by $2.2 million or $0.20 per share compared to the third quarter of 2007. This increase was driven by a $2.7 million increase in resale revenues and a $2.5 million increase in equity and earnings of affiliate, which resulted from our $53 million VELCO investment made in December of 2007.

Resale revenues rose mainly because of substantially higher average market prices, and more power available for resale. As we have noted previously, we are experiencing a decline in retail sales volume, resulting from the downturn in the economy and increased conservation efforts. For the first nine months of 2008, retail sales volume decreased 2.9%.

On a positive note, we’ve been able to sell the additional excess power into the market at an advantageous time, which accounts for much of the revenue increase.

While we will continue this resale strategy, market prices have already comedown considerably in the fourth quarter, so sustained resale sales revenue at this level appear unlikely. Purchase power expenses increased $2.1 million because of increased output from Vermont Yankee and independent power producer, compared to the third quarter of 2007. This increase was partially offset by fewer short-term purchases due to the circumstances I described a few moments ago.

Other operating expenses decreased $1.2 million, due to lower transmission expenses, reflecting the pass through of our share of credit from ISO New England through VELCO and less storm activity than in the same period in 2007. For the first nine months of 2008, operating revenues increased $16.2 million, including $12.7 million in resale revenues, $1.6 million in retail revenues and $1.9 million in other operating revenues.

Resale revenues rose for the reasons I described earlier. Retail revenues increased $6.8 million, due mainly to the 2.3% rate increase effective February 1, and from higher average unit prices due to customer usage mix. As I discussed previously, falling retail sales volume offset these increases by $5.2 million.

As in the quarterly result, purchased power expenses increased $4.2 million due to increased purchases of output from Vermont Yankee and independent power producers, which were partially offset by decreased short-term purchases and deliveries from Hydro-Quebec.

Other operating expenses increased $4.2 million, largely for two reasons. First, transmission expenses increased as a result of higher rates under the New England Open Access Transmission Tariff and costs from VELCO for its capital projects and administrative and general costs.

Secondly, maintenance expenses decreased $2.2 million, due to lower service restoration costs. For a more comprehensive analysis of the company’s third quarter financial performance, please refer to our earnings release which was issued this morning.

Turn to go slide seven, the company’s cash position was $10.7 million at September 30. To insure we have sufficient capital to fund our planned capital expenditures of $41 million this year, we have closed in escrow pending regulatory approval on an increased to our credit facility, from $25 million to $40 million dollars. Regulatory approval is expected this week.

As we have previously said we may also issue up to $25 million in common equity, late this year or early in 2009, depending on market conditions. Over the next several years, we will continue to access the capital markets for both debt and equity, with the goal of maintaining our capital structure at around 55% equity and 45% debt. Although year-to-date earnings have been strong we are reaffirming our previously issued guidance for 2008 earnings of $1.50 to $1.60 per share.

We considered a number of factors including the expected duration of the current Vermont Yankee refueling outage, softening market prices, seasonal spending, possible storm activity and the impact of the economy and weather on retail sales in reaching this conclusion.

As we begin to look at 2009, it is important to remember that power costs variability such as we have experienced so far this year will be much less of a factor in the variability in our earnings because of the quarterly power costs true-ups that are part of our new alternative regulation plan.

Our allowed return on equity was reduced as agreed in our last rate case MOU from 10.71% to 10.21%, effective November 1, 2008. Our alternative regulation plan contains a mechanism to adjust the allowed return on equity each year by one half of the change in the ten year treasury yield as measured in the last 20 trading days prior to each October 15.

For 2009, they equated to a reduction of 44 basis points for an allowed ROE of 9.77%. This will be reset next year at the same time, so we will have an opportunity to see our allowed return on equity improved for 2010 if rates rise. Under alternative regulation in 2009, our ROE will fall in a range between 100 basis points below and 75 basis points above the 9.77%, which would equate to 8.77% on the low end and 10.52% at the high end.

Now I would like to turn the call back over to Bob.

Bob Young

Thank you, Pam. During the first nine months of the year, we have made good progress in meeting the objectives necessary to achieve our long-term goals. Our financial performance has also been stronger than expected, but even more importantly our new alternative regulation plan will insure earnings stability, which is a desirable and unusual characteristic in today’s market.

Over the long-term, we believe our strategy will deliver growing benefit to shareholders and customers. As I reviewed to you earlier, we are implementing an accelerated capital plan to address our aging infrastructure. This will insure that we continue to provide exceptional service and superior reliability for customers over the long-term.

We are making strides to improve our financial strength as evidenced by the approval of our alternative regulation plan, which will help us restore a credit rating to investment grade and finally, we have engaged in collaborative planning opportunities and contract negotiations that will help us create an affordable reliable and environmentally responsible electric future for Vermont.

We believe this strategy will position us for long-term success and allow our company to weather the current market conditions to provide increased value to our shareholders and customers alike.

Thank you for joining us today. At this point, Pam and I would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul Ridzon - KeyBanc Capital.

Paul Ridzon – KeyBanc Capital

Got a couple of questions; it sounds like with your increased credit facilities you may have a little more timing around when you can come to market with equity; is that fair?

Pam Keefe

That’s true.

Paul Ridzon - KeyBanc

And then, I had a question on the ARP, the 8.77 to 10.52; are there any sharing bands associated with that or are those hard limits?

Pam Keefe

Those include the sharing bands and the dead bands. So the 8.77% would be the absolute lowest it could possibly be and 10.52 would be the absolute highest.

Paul Ridzon - KeyBanc

Can do you do the sharing bands?

Pam Keefe

Sure, there’s a dead band of 75 basis points up and down around the allowed ROE and then on the down side there’s an additional 50/50 sharing of the next 50 basis points

Paul Ridzon - KeyBanc

And where is the floor on that?

Pam Keefe

The floor would be the 8.77.

Paul Ridzon - KeyBanc

You’re implicitly saying that the fourth quarter should be a loss or a gain of $0.05 per share. Is this DY outage unplanned or I’m guessing you could have a loss in the fourth quarter.

Pam Keefe

This was a planned outage. So given that fact, we do have some catch up in seasonal spending, that we expect and then given the volatility in the financial markets we are unsure of what that will bode or how that will bode in the fourth quarter in terms of the impact on such things as our trust.

Paul Ridzon - KeyBanc

And then I guess lastly, the question is just around the pension and to funding this?

Pam Keefe

That’s right. We are still in a decent funded position such that we don’t have a required funding in 2009, but obviously we are all watching the markets and we’ll continue to monitor that and we will have to revalue our pension assets as of the end of the year.

Paul Ridzon - KeyBanc

Is that due based on the September 30 or a more recent look at the market insurance.

Pam Keefe

That was based on September 30, but then we also did look at it again in the middle of October.

Operator

(Operator Instructions) Your next question comes from Danielle Seitz - Maxcor Financial Group.

Danielle Seitz - Maxcor Financial Group

I didn’t quite catch the base for the reduction of the 10.21% ROE. Why is it reduced to 9.77, does it have something to do with general rates?

Pam Keefe

Yes. Under the alternative regulation plan when we prepare our base rate filing each year, we have to adjust our allowed ROE by one-half of the change in the 10 treasury yield and we measure that over the 20 trading days prior to each October 15. So when we looked at the yields this year, compared to last year, that resulted in a 44 basis point reduction that we needed to make to our allowed return on equity.

Danielle Seitz - Maxcor Financial Group

Okay and the other question that I had was to do with, Vermont Yankee had some unscheduled outage, I think in the third quarter last year.

Pam Keefe

That’s correct.

Danielle Seitz - Maxcor Financial Group

That relative to EPS, how much was that impact do you remember? I thought it was significant, but I can’t remember the number.

Pam Keefe

I don’t remember that off the top of my head.

Bob Young

Danielle, we can get that for you though.

Danielle Seitz - Maxcor Financial Group

It’s just that I was wondering if this year looks more normal than last year where you were hit with storms and outage at Vermont Yankee etc. So, I was wondering if we should use 2008 as a mortgage percentage as type of year in terms of operations?

Pam Keefe

Well, in this third quarter, we had unusually high market prices for our excess power. So I would say that this third quarter would be a little higher than what would be representative of a normal quarter.

Danielle Seitz - Maxcor Financial Group

Right and last year would that have been unusually not I guess. When you are looking your recovering your fuel costs or purchase power costs, are you still under recovered at this point or you are about even; I don’t know if you are keeping a tally of the under recovered fuel costs

Pam Keefe

Well, we don’t do that this year because we don’t have that sort of mechanism and the last rate case was the bottom-line settlement, but we will be doing that next year because the power cost adjustment mechanism is effective January 1.

Danielle Seitz - Maxcor Financial Group

And it looks like you must be close to the return on equity allowed since you’re filed relatively smaller rate case? I mean as of the end of September.

Pam Keefe

We are still below the allowed return of equity for this year, but for next year because our allowed return on equity decreases, we do not need much of a rate increase at all.

Danielle Seitz - Maxcor Financial Group

Okay, and at this point, you’re total CapEx for next year including the $21 million you anticipate to spend on the transmission side, would it be in the area of roughly more like $50 million, $60 million, maybe?

Pam Keefe

It’s about $30 million for our internal capital spending, and then the $21 million for VELCO.

Danielle Seitz - Maxcor Financial Group

Okay and since you anticipate to issue $21 million in equity next year, does that mean that this will constitute most of your outside financing? You would need some external financing aside from the equitation assurance that you will make for VELCO next year or you don’t anticipate that?

Pam Keefe

We anticipate as I mentioned before up to $25 million in equity at some point and then we will also probably need additional debt. We’ll be going to the market over the next several years for a combination of debt and equity, but upside in the credit facility the $40 million also gives us a nice occasion.

Danielle Seitz - Maxcor Financial Group

Okay and in terms of the CapEx on AMI, how do you visualize that on a regular basis, I mean how do you see the curve of the expenditures of that project, roughly for the year? I mean this is going to be a long-term project pricing

Pam Keefe

Yes, it will be about $40 million over four years, about four or five or so will be next year and then you’ll see it ramp up and then 2012 would be the last year of that large project.

Danielle Seitz - Maxcor Financial Group

And you’ll recover that through a rider of some sort. I mean the same, the same adjustment that you’re going to make automatically, makes the same return as the one you have just got from the alternative regulatory plan.

Pam Keefe

That’s right.

Operator

Your next question comes from Paul Ridzon – Keybanc capital.

Paul Ridzon - KeyBanc

Just so we can keep a track of it, what were the ten-year averages that drove to 44 basis point reduction and when is the next measurement period?

Pam Keefe

Well the next measurement period would be next October 15, because we filed our base rate filing on October 31 of each year. So next year we’ll take a look at what the ten-year treasury did for the 20 trading days ending October 14, 2009 and compare that with 2008. I don’t have those numbers with me Paul, but I can share them with you.

Operator

Your final question comes from Danielle Seitz - Maxcor Financial Group.

Danielle Seitz - Maxcor Financial Group

Just to see if there was any reaction from the rating agencies yet or are they waiting for the next rate case to make any kind of comments on the stabilization plan?

Pam Keefe

I think they viewed the alternative regulation plan in a very positive way, particularly because it contains the fuel adjustment mechanism. We’ll be meeting with them in December to talk about more specifically their reactions to it and then they have told us and it’s in their most recent write up on CV that they are looking for us to add a thicker equity question.

Danielle Seitz - Maxcor Financial Group

So you think that it will come after that, it’s more likely to come after that.

Pam Keefe

Yes.

Operator

Okay, there are no further questions. I would now like to turn the call over to Bob Young for closing remarks

Robert Young

I’d like to thank you all again for participating with us today and to remind you that both Pam and I will be at the EEI financial conference next week in Arizona and we would be very pleased to see any of you while we were out there. So again thank you for joining us today, and we look forward to talking to go you soon.

Operator

Thank you for your participation in today’s conference. To access the replay for this call, you may dial 1-888-286-8010 or 617-801-6888 internationally, with the replay pass code of 18074445. The replay will be available in approximately one-hour’s time. This concludes the presentation and you may now all disconnect. Have a great day.

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