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Executives

Phil Lembo - Assistant Treasurer

Jim Judge - Senior Vice President, Treasurer and CFO

Analysts

Daniel Fidel - Brean Murray, Carret

Paul Patterson - Glenrock Associates

Steve Gambuzza - Longbow Capital

Ted Durbin - Goldman Sachs

Bill Apacelli - Citi Investment Research

Debra Bromberg - Jefferies & Co

John Peckham - Pioneer Investments

Peter Hark - Talon Capital

NSTAR (NST) Q4 2008 Earnings Call January 23, 2008 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008 NSTAR earnings conference call. My name is Lacy 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 session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Phil Lembo, Assistant Treasurer. Please proceed.

Phil Lembo - Assistant Treasurer

Thank you and good morning, everybody, and welcome to NSTAR’s conference call to discuss our reported earnings for the fourth quarter of 2008. Before we get started with Jim Judge, NSTAR's CFO, let me say that this conference call contains forward-looking statements that involve risk and uncertainties, these statements are based on our current expectations, estimates and projections of management, and they are not guarantees of future performance.

Our actual results or outcomes could differ materially. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our filings to the Securities and Exchange Commission.

This concludes my opening comments. Now, I’ll turn the call over to Jim Judge.

Jim Judge - Senior Vice President, Treasurer and Chief Financial Officer

Thanks, Phil. Let me also welcome everyone this morning. Yesterday, we reported fourth quarter and full year 2008 results. Reported earnings for the fourth quarter of 2008 were $0.39 per share compared to the $0.37 for the same period in 2007. That’s an increase of $0.02 or 5.4%. Reported earnings for the year ended this December 31 were $2.22 per share compared to $2.07 in 2007. That’s a 7.2% increase.

Results for the year were in line with our guidance to the upper half of the $2.16 to $2.26 range and Wall Street estimates. For the quarter we were able to achieve an increase in earnings per share despite a 1.6% decrease in electric sales. This is primarily due to high transmission revenues and lower interest costs.

Our gas sales increased about 1% in the fourth quarter as heating degree days were up about 6% in our service area.

I will characterize the economic conditions in our eastern Mass service territory as not as good as they were 12 months ago, but overall still considerably better than other parts of the country. Unemployment in the greater Boston area is now at 6.1% versus the U.S. unemployment rate of 7.1%. The office vacancy rate is currently at 12.1% in the Boston area, while across the country, office vacancy rates this quarter are 14.7%.

The specific drivers for the earnings increase this quarter were as follows: higher transmission revenues contributed $0.04, reflecting the completion of our 345kV transmission project, four months ahead of schedule.

I should add this third line, third and final line will improve the regions reliability and reduce cost, energy cost to our customers as 1800 megawatts of additional energy can now be imported into the Boston area. Another positive fact that was the decline in interest costs reflecting lower rates, which contributed $0.02 for the quarter.

Also, electric distribution revenues provided $0.01 to earnings in the quarter to the annual performance based rate adjustment. Somewhat offsetting these positive factors was a $0.03 impact of higher O&M costs, all of which is attributed to unplanned expenditures related to litigation liabilities and recently completed union contract negotiations, which I'll discuss a little later.

Closing out the reconciliation were increases in depreciation and property taxes, which caused us $0.02 in total for the quarter.

Now I'd like to briefly discuss the full year 2008. As I mentioned earlier, reported earnings per share for the year ended December 31, '08 with $2.22 compared to $2.07 for the same period last year.

In a nutshell, I characterized 2008 as a very successful year for the company and our customers. From an operations perspective, our service quality measures for the year were again at very high levels, electric and gas system reliability in response were very strong.

In addition, service quality indicators related to billing, meter reading and call center performance were all very positive and exceeded our 2007 results. In fact most of the service quality measures reflect performance that is in the top quartile of our industry.

From a financial perspective, we were able to achieve solid earnings growth despite some challenges. Our electric sales were flat for the year and gas sales were down 1.4%.

Our earnings guidance for 2008 had assumed 1% to 2% growth in our electric and gas sales.

However, if you can contrast our sales results with the fact that the electricity consumption in the U.S. maybe down about 4% in 2008 as one industry analyst has recently reported. Our positive performance related to the rest of the country is a testament to our solid customer base in greater Boston.

Heating degree-days in our service area were down 2.6% compared to last year and 3.5% below normal. While cooling degree-days were about 13% lower than last year and just about normal. So weather was a negative to our results this year. Also higher energy prices early in the year and weakening economic conditions resulted in lower levels of customer usage in 2008 versus 2007.

Other factors that contributed to our results for the year were as follows; first, was the continued expansion of our transmission business. Transmission revenues for the year were higher as we energize the third and final line of our 345kV project in December. I was ahead of schedule and under budget.

This marks the successful completion of that project and as we reported in the second quarter, New England's transmission owners including NSTAR received a positive resolution from FERC on our allowed ROE. The FERC ruling set our ROE at 11.64% with the opportunity to earn an additional 100 basis points on new construction projects. I am excited about the long-term prospects for our transmission business which I'll cover in a few minutes.

Another factor in the 2008 results was decline in interest costs reflecting rates that were lower than last year and lower than we expected at the start of the year. It's important to note that these favorable rates and our uninterrupted access to the capital and commercial paper markets during a very volatile period for the financial markets are a result of a very healthy A1/P1 commercial paper credit ratings and our strong financial position. In short, our very strong credit profile proved to be one of our most valuable assets as the credit crises unfolded during the year. Our short-term borrowing costs were substantially lower as a result.

On the western positive side our O&M costs for the year increased by more than our guidance of 2% growth. But there were very good business reasons for that. While our guidance did call for an increase in O&M expense in 2008, the increase did not include the two unplanned items that occurred in the fourth quarter that I touched upon early in my reconciliation. These non-recurring items totaling approximately $4 million, involved litigation claims related to two pending cases and costs related to resolving certain labor related issues ahead of the successful completion of contract negotiations with our largest union. This new contract which represents about 60% of our workforce was scheduled to expire on June 1, 2009 but just last night was ratified and we will now extend the contract to June 1, 2012. While unplanned at the start of the year this contract resolution is very positive development for the company. I’d like to close out the (element) discussion by pointing out that there was virtually no change in our bad debt expense when comparing the year 2008 to 2007 just as we had expected.

Now I'd like to conclude my discussion of the year by mentioning some very important regulatory developments that occurred in 2008. First, early in the year, NSTAR became the first utility in the state to offer a customer friendly wind option for customers and DPU approved our NSTAR Green program. And in July the governor signed in to ward a Green Communities Act which codified Massachusetts’ aggressive commitment to renewable energy and energy efficiency. The act also provided opportunities for utilities to recover increased cost and it established various performance incentive opportunities.

On the hills of the Green Community's Act, the DPU issued a decoupling order that implement certain provision to that act but was not a one side special approach to regulation. DPU allowed NSTAR seven-year rate plan to remain in effect through 2012 and allowed for the recovery of lost space revenues associated with increased spending on energy efficiency that is expected from the Green Community's Act. I believe that these developments demonstrate the collaborative and constructive regulatory and legislative framework that exists here in Massachusetts.

Now I would like to turn your attention to 2009. Our earnings guidance for 2009 is in the $2.33 to $2.43 range, that $2.33 to $2.43. And our long-term earnings growth outlook remains at 6% to 8%. I should emphasize that we will achieve this level of growth about keeping our delivery prices to customers flat. Providing very high levels of reliability and service to our customers and implementing the energy efficiency and renewable goals set out in the Green Communities Act.

As one example NSTAR has already filed to increase expanding on energy efficiency, by about 50% from historic levels to $74 million in 2009. Other specific items are as follows, first our sales estimates assume normal weather conditions throughout 2009, our expectation is that our electric sales will grow above 1%, while gas sales will be flat.

Secondly, the annual performance space rate factor is 1.74%, it was implemented as of January 1, 2009. I’d like to remind everyone that customer see no increase in the delivery portion of their bill. As we implement the new rates each year because any increase in distribution rates is offset with an equal reduction and the transition charge. Our customer’s delivery rates will remain flat through 2012.

Third, we expect higher transmission revenues, as a result of spending about $100 million on our transmission system infrastructure in 2009. The spending will further improve the reliability and capacity of our transmission system, it will include sub-station expansions, transformer installations and Barnstable in [Kaba]. And other upgrades in other parts of our territory.

Total in stock capital spending is expected to be above 365 million for the year. Lastly we believed that O&M costs will likely decrease by about 2% in 2009. Due to cost control efforts across the company in the absence of certain non-recurring items from the fourth quarter of 2008. That I covered earlier.

Other reductions are expected to be lower outside contract and consultant costs, lower storm related costs and reductions in our vehicle fleet and related cost just to name a few.

We are comfortable with our guidance and we're confident in our ability to deliver another solid year both operationally and financially in 2009.

Before concluding my formal remarks I'm pleased to report that on December 15, NSTAR together with Northeast Utilities announced plans to construct a new transmission line in New England. This project is in the very early stages of planning and negotiation, would involve the construction of a 1200 Megawatt transmission line from Hydro-Quebec facilities in Canada, over existing rights-of-way to Southern New Hampshire.

This line would bring clean, low covet, cost effective hydro-electric power to New England. Proposal will move forward after receipt of a declaratory judgment from FERC that essentially gives Hydro-Quebec exclusive rights to the capacity in line.

In addition power purchase agreements must be successfully negotiated, before construction can begin. We expect the project's total cost to be in the $700 million to $800 million range with NSTAR share being about 200 million. If approved construction would likely commence in the 2011 to 2013 timeframe.

The unique feature of this project is that it would provide an expansion of New England's transmission system, allowing access to clean energy from Canada without raising regional transmission rates for customers. We believe that FERC will act on our request in the first quarter of this year, but there is no statutory deadline.

In closing I'd like to say that here at NSTAR we are all very proud of our long track record of delivering positive performance for our customers and for our shareholders. Our success is really a credit to the financial discipline we have in place and our continuous focus on and ability to provide high levels of reliability and service for our customers and the constructive regulatory process we have here in Massachusetts.

In addition our healthy 8 plus credit ratings and positive cash flow have provided us with uninterrupted access to the capital markets during a very volatile period in the financial markets and its worth noting we have no debt maturities in 2009.

I’m very pleased with what we have accomplished in 2009 and I’m optimistic about the prospects for 2009 and beyond.

Now we’d be happy to take any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Daniel Fidel with Brean Murray, Carret. Please proceed.

Daniel Fidel - Brean Murray, Carret

Good morning gentlemen, congrats on a very solid fourth quarter fiscal year ending.

Jim Judge

Thank you, Dan.

Daniel Fidel - Brean Murray, Carret

Just a couple of quick questions on my side can you give us any additional specifics on what your assumptions are for bad debt expense and potential expense in your 2009 guidance and then as a separate follow on question, can you talk a little bit about your capital budget 365 million can you break that out little bit in terms of how much you’ll be spending on the single project how much for sort for utility growth.

Jim Judge

On the bad debt issue we have budgeted bad debts to increase in 2009 slightly we actually as I said in my comments we are flat with 2007, in fact I was pleased to see the days receivables outstanding at the end of the year, this year we are actually slightly better than a year ago. So, we've done a good job in terms of receivables to recognize sort of the economic impacts and anticipate an increase in expense.

The pension area; our pension plan meets all funding requirements we contributed about $70 million in 2008 cash into the plan and we have a plenty of another $25 million contribution in '09. We do have a regulatory treatment the utilities in Massachusetts have, which really mitigates the volatility in P&L impact of pension expense. Probably five years ago the department put this mechanism in place that smoothes the impact of increased in FASB expense. So, it really has minimal impact going forward.

On the capital budget, I think I mentioned we have about a $100 million of CapEx associated with the transmission business, probably 200 million associated with distribution in its more sort of business as usual, no major new sub-stations in there, and then there is about $50 million to $70 million when you look at our gas operations, IT investments, customer care, et cetera. The end regulated side, very small budget of $7 million in CapEx.

Daniel Fidel - Brean Murray, Carret

Sir, thank you for that clarity. Very helpful.

Jim Judge

You're welcome,

Operator

And your next question will come from the line Paul Patterson with Glenrock Associates. Please proceed.

Paul Patterson - Glenrock Associates

Good morning guys.

Jim Judge

Hey, Paul.

Phil Lembo

Hey, Paul.

Paul Patterson - Glenrock Associates

A couple of things. The O&M; how does the contract that you guys signed impact that, does that have any impact and just what cost containment efforts are leading into the change in O&M expansions?

Jim Judge

The contract is to get very favorable terms and I guess I consider them below market based upon recent deals done in the region here. I think the annual increases over the three years are above 3% a year. In terms of the budget going forward as I mentioned is about $4 million of non-recurring costs that we had in '08 that will be there in '09. We did some advertising in '08 that's not budgeted as well. The plan does call for using internal labor to replace contractors, so our contract to consultant costs would be lower. We need some progress on fleet reductions. We actually get hit with unusual storm cost issue as well in 2008, there were 50 lightning events this summer, and the normal number is about 20. So we think we will have lower storm costs during the year. A number of pieces contributed to the budget where we are confident we will be able to achieve it, and as I say, the union contract agreement was a step in the right direction.

Paul Patterson - Glenrock Associates

Great. Now the sales growth forecast, you mentioned how things -- it seems to be worse I guess in the general nation maybe, then you guys -- what is it that, that makes you feel more confident about the electric sales growth, and as the weather, I think it was weather normalized for gases. What's causing the gas to go down and the electric resource to stay the same?

Jim Judge

We don’t weather normalize, we report actual results, but if the heating degree days for the year were down from last year and were down from normal than the cooling degree days at this year were actually close to normal, but they were down significantly from what we had in 2007. I mean, as what Boston said in our calls and in our presentations, we have a high quality customer base, and I am reluctant to use the word recession-proof, but very, very small industrial base. Nearly 60% of our sales from the commercial sector, when you look at what makes up those sectors, it’s a lot of state and government buildings, a lot of colleges and universities, biotech sector, a lot of sectors that may be having some impacts but generally the building and the energy use will continue. So, I think this year's numbers, 2008's numbers, we've seen a lot of decline of 2.5%, 3%-4% across the industry, and our number was 0.0, I think that’s a testament to the quality of the customer base that we have.

Paul Patterson - Glenrock Associates

Okay. So basically, the economy isn’t impacting you guys as much and the weather I guess in 2008 versus what normally it would be in 2009 on the gas side is the reason for the decline now, am I getting that right?

Phil Lembo

And electric, Paul. You mentioned gas, our big quarter for our electric sales for the third quarter and that was about 3% below normal weather. It was significantly below the year before. So, a lot of it is a normal weather plan versus a bad weather actual in '08.

Paul Patterson - Glenrock Associates

Okay. I hear you. I just wanted to -- I guess in the fourth quarter it was 1%, right? There was a 1% increase?

Phil Lembo

In gas?

Paul Patterson - Glenrock Associates

In your projections for sales, right. Anyway, I'll talk to you guys about it afterwards. But the other thing is the green centers, the green communities. The cost savings there, how do they figure out whether or not reductions due to conservation versus the economy again? Is that basically the fact that gives you decoupling even if sales growth goes down because of economic reasons?

Jim Judge

No. I think we don’t have decoupling for NSTAR until 2012 in all likelihood. Between now and then, we get to calculate how much of revenues were lost as a result of energy spending and energy efficiency, and the whole science has been in place for 20 years or so now, Paul, monitoring evaluations there. There is history of how much. If there's a light program, how many light bulbs are installed, what this light is, what the average saving is and sort of that sampling? As I said, it’s a science that’s been well defined. So, there are clear estimates of how much of your sales declines due to energy efficiency programs and then you can make some judgments as to how much is due to the economy or weather. But I think it’s not going to be a problem proving what the numbers are from a regulatory perspective in terms of loss-based revenues.

Paul Patterson - Glenrock Associates

Okay. The 1.6% decline in the fourth quarter versus the 1% sales increase that we are seeing for 2009, what's going on there? In other words, I guess is that because of efficiency or how do we look at that?

Jim Judge

You know, I guess I don’t want to read a lot into the 1% on the electric side, Paul. We stated the gas number, we're anticipating as flat for '09, and anything over 0.5% rounds to 1%. So, we're anticipating relatively flat to slightly increasing electric sales, largely due to normal weather. We're expecting another year of flat sales basically in the gas side.

Paul Patterson - Glenrock Associates

Okay. Okay, thanks a lot guys. I appreciate it.

Operator

And our next question will come from the line of Steve Gambuzza with Longbow Capital. Please proceed.

Steve Gambuzza - Longbow Capital

Good morning.

Jim Judge

Hi, Steve.

Steve Gambuzza - Longbow Capital

Just in terms of understanding what the weather adjusted sales growth was in 2008. It sounds like you had close to normal weather in '08 but you're coming off a very hard comp in '07. So is it fair to say that weather adjusted sales, there was actually positive sales growth this year?

Jim Judge

Well first Steve, we don’t actually weather adjust our sales and the weather comp was not as good. So, versus normal, as I said, heating degree days were down 3.5%. And on the cooling degree side, which again is primarily driven by the third quarter, the third quarter was down about 3%. And if we add up all the cooling degree days that you get on those shoulder months that really don’t contribute anything, it was about flat.

Steve Gambuzza - Longbow Capital

So your actual reported electric sales for the year were flat?

Jim Judge

Correct.

Steve Gambuzza - Longbow Capital

Okay. And 2007 was above average weather year, right?

Jim Judge

2007? Yes.

Steve Gambuzza - Longbow Capital

And 2008 was a below average weather year?

Jim Judge

Correct.

Steve Gambuzza - Longbow Capital

Okay. So you had a very difficult comp and you still had flat sales growth.

Jim Judge

That is correct.

Steve Gambuzza - Longbow Capital

So if you had normal weather in '07 and normal weather in '08, it would seem like there was actually growth in '08?

Jim Judge

I'd probably come up with that same math, yes.

Steve Gambuzza - Longbow Capital

Okay. And then, what are you spending on DSM in 2009 versus what you spend in 2008?

Jim Judge

We've spent about $50 million historically in the budgets that we have before the DPU for approval, has about a 50% increase in that. I think that budget number is $74 million.

Steve Gambuzza - Longbow Capital

And, you had flat sales growth not withstanding $50 million you spent in 2008, do you have any sense as to what that $50 million contributed to how much of a load growth adjustment you actually were able to achieve through that investment?

Jim Judge

I don’t have that number readily available, but as I say that we do file with the regulator what the anticipated savings and you know benefit cost ratios are of all of our programs.

Steve Gambuzza - Longbow Capital

So, I guess if we say that, let’s say you know you have flat sales growth in ‘09. You know, part of the reason you are not growing would be that you are investing $75 million of cash due to improved efficiency. So you are actually going to get some margins. You would actually have some positive margins from growth if that happened due to this adjustment. Is that the right way to think about it?

Jim Judge

You know, I just had a point out that increased spending in the energy efficiency area, let’s call it an increase spending of $25 million; not only do we get recovery of that in but we get recovery of the lost revenues that that $25 million generated.

Steve Gambuzza - Longbow Capital

Yes. My point is that if in 2009, your sales are precisely flat in 2008, and there would actually be some margin from load growth as a result of this investment you are making in energy efficiency?

Jim Judge

Yeah, there’d be additionally revenues, the recovery of those loss-based space revenues from the energy efficiency.

Steve Gambuzza - Longbow Capital

Okay. But you can’t, I guess, you know, could you give me what a reasonable expectation would be for you know if you’re going to invest $75 million, you know, might you offset a 0.25 load growth or 50 basis points of load growth, how do you think your expectation for what your $75 million investment will yield?

Jim Judge

I don’t. And again, we've done $50 million a year pretty consistently, so really the increment is $24 million and I don’t have readily available what that impact is.

Steve Gambuzza - Longbow Capital

Okay. Could you comment on any plans you might have to invest in new solar capacities?

Jim Judge

We're looking at that opportunity. We're struggling with the economics obviously as a number of people are I think the other utilities in Massachusetts as well. We actually offer an NSTAR solar program, where we help facilitate customer's access to contractors and solar panels and advice them on the installation. In terms of ownership, we're looking at opportunities, there's certainly nothing eminent, nothing announced but again it’s the economic the challenge, everybody sort of is committed to them.

Steve Gambuzza - Longbow Capital

Can you tell me what the opportunity that the law permits you to invest and how many megawatts?

Jim Judge

The legislation allows utilities to invest up to 50 megawatts of capacity.

Steve Gambuzza - Longbow Capital

I guess it sounds like we're unlikely to see significant movement on it this year. Is this kind of a longer term opportunity for you?

Jim Judge

Yeah I think we're looking at sort of some projects that we can use, look we want to some pilot projects but certainly smaller, less than a megawatt of these to begin our step into this world in terms of ownership. But there's nothing eminent in the order of magnitude that the legislation calls for allowance right now.

Steve Gambuzza - Longbow Capital

Okay. Great, thank you very much for your time.

Jim Judge

Welcome.

Operator

And our next question will come from the line of Ted Durbin with Goldman Sachs. Please proceed.

Ted Durbin - Goldman Sachs

Hey guys. I want to ask about the transmission line, the Hydro-Quebec transmission line. Can you just give us a sense of what you are thinking in terms of expected return or what the FERC's and ISO roles will be in terms of is there anything that, what of kind of approvals you need what’s the process on all those things?

Jim Judge

The returns that we’d anticipate and returns commensurate with FERC’s transmission investments and the process really is the FERC needs to give us authority to go forward with the project as we have proposed it but the project really relies on long-term power contracts that justify the economics in other words we think the line will come and deliver power to our customers including the cost of the transmission line at a rate below the market rates in the region so our customers in the region will benefit in terms of the net savings really not a major role for ISO here because we’re not looking at socializing these costs and spreading around New England, as essentially Hydro-Quebec is paying the freights per line to deliver the power under these purchase power agreements. So FERC has a role and the DPU and other regulators in New England have a role to the extent that their purchase power agreements be approved by them.

We’re hoping for the FERC decision in the first quarter I think they’ve opened to dock it there I think maybe today is the last day for parties to intervene and we’ll move from there based on that decision. Again I wouldn’t anticipate construction on this thing until 2011 to 2013 which nicely coincides with a very strong couple of years for instance dimensions of cash flow we get recovery of solar deferrals out in that window.

Ted Durbin - Goldman Sachs

Okay good. And then in terms of getting the line sighted and anything like that you’ll have to go through the state sighting boards and what not or how does that work?

Jim Judge

We do but its all in New Hampshire all on existing rights of way owned by utility so we are confident I guess that the sighting issues will not be significant.

Ted Durbin - Goldman Sachs

Okay, and then can you talk a little bit about just under the PBR the inflation adjustments that you’re expecting something you got, I think it was a 1.74% for this year and while you’re looking at 2010 given the way our pricing is coming in right now.

Jim Judge

Yeah this PBR is tied to GDP-P1 and I just said that then the number was 1.74% last year. Our 2010 forecast shows the number to be on similar so what we had and that went into effect January of ’09 and we’ve seen that the first quarter calculations the summary of four quarters in first quarter calculations actually a number of about 4% so we have a planning and anticipate adjustments similar to what just implemented at the start of this year.

Ted Durbin - Goldman Sachs

Okay, thanks.

Operator

And our next question will come from line of Bill Apacelli with Citi Investment Research. Please proceed.

Bill Apacelli - Citi Investment Research

Hi, Good morning

Jim Judge

Hey Bill.

Bill Apacelli - Citi Investment Research

Most of my questions have been asked but I guess just quickly any word on the tax refund from the IRS, is that still potentials second half of ’09 have been? Yeah I guess this is related to the provision of the simplified service cost methodology.

Jim Judge

Yes, it was committed on this number a few times and said they were very, very confident we’re going to get it I think the numbers of about a $150 million including interest that would be entitled to we are in discussions with the IRS where I think there is the meeting scheduled for early February to try to move the ball forward and again we do anticipate recovery of that number this year.

Bill Apacelli - Citi Investment Research

Okay, great. Thank you.

Operator

And our next question comes from line of Debra Bromberg with Jefferies & Co. Please proceed.

Debra Bromberg - Jefferies & Co

Hi. Good morning.

Jim Judge

Hi Debra.

Debra Bromberg - Jefferies & Co

Just a couple of quick questions here. Could you talk about the targeted timing for signing the PPAs for the Hydro-Quebec line and what roughly what percentage of capacity would you need PPAs for you to move ahead with the project and secondly if you normalize for unusual storm cost and the $4 million of other unusual items of O&M in 2008, how does that effect the change in O&M you are collecting n '09.

Jim Judge

Well the last one, as we mentioned those about $4 million of nonrecurring items that will go [today] and those the two items that we have in the fourth quarter and, there is a couple a million dollars I would say of storm related cost through to that kind of the severe weather we had this summer. In terms of the transmission project, I think we’ll begin the process in mid this year and may be in the next year or so be able to get purchase power agreements. We would think that the terms would be attractive enough that not only with the utilities be interested in signing up for a piece of the PPAs but the regulators would as well given the fact that its pretty much a guaranteed savings if and that delivery cost is going to be below market cost in the area, so we are [crossing] that the pricing will still be so attractive that it will be fully subscribed.

Debra Bromberg - Jefferies & Co

And just one another quick question. The $100 million that you have budgeted for transmission spending this year, is that at the FERC level? Is that into FERC jurisdiction?

Jim Judge

Yes, it is.

Debra Bromberg - Jefferies & Co

Great thank you.

Operator

And our next question will come from the line of (inaudible). Please proceed.

Unidentified Analyst

Thank you, just to clarify on the load growth, I know there was a bunch of question on an earlier, but is there any difference between how the economic issues are affecting gas growth versus electric load growth.

Jim Judge

I am not so sure I would see any significant shift there. I think gas growth is so weather driven more so than in the electric side. But I think both are impacted by the economy economic conditions and again even though our numbers are flat essentially. I think it is attribute to the quality of customers that we have because you know lot of other CFOs around the industry would be thrilled with zero growth numbers these days.

Unidentified Analyst

And some of the O&M…

Jim Judge

I just wanted to add something to that too, just as you say there were some numbers going around. But just to make sure you understand that on the cooling degree side, on the weather side for 2007 versus 2008. We have 13% less cooling degree days which basically impacts our electric business significantly and we had, still we are able to get to zero. So we are at 13% unfavorable weather comparison there. So don't want to confuse the fact in terms of planning for '09 because we are talking about '09 just being normal. So that comparison of '08 to '07 was significantly mild there. And even the heating degree days were about 2.6%, so there was pretty significant unfavorable weather '08 versus '07. So just to clarify that.

Unidentified Analyst

Appreciate that. And the O&M cuts, some of the O&M cuts that you are making here in 2009 to help the effort. Are these O&M expenses going to come back in 2010 and going forward so in essence are they just sort of temporary for 2009 just to deal with some of these economic some sort of lackluster low growth I guess?

Jim Judge

No we have been, I think one of the things we do get credit for as a company is to have been very disciplined, done a good job in terms of both our O&M and capital spending and our capital spending decline, some of it reflects the fact that there isn’t a whole lot of growth. People aren’t building substations because there's expansions going on. And on the O&M side, I think we've got a track record that shows that we can take cost out of the business and still do a great job for our customers and so this budget is in that spirit. We think that we’ll be able to take some cost out of the business and they are sort of permanent changes and we'll continue to manage our costs effectively beyond '09.

Unidentified Analyst

And also in reaffirming the 6% to 8% earnings growth rate is an underlying assumption there that low growth sort of ships back to normal in 2010 and onwards?

Jim Judge

Yeah. We are not giving any guidance at this stage for years beyond that but I will say that the 6% to 8% earnings guidance has been out there for a couple of years. It would have hit the target I think this is the third year in a row and based upon the guidance for '09 we are confident that we'll hit it again and beyond. So, if sales growth do bounce back that will be great. If they don’t I think we've got a track record that shows that will figure out a way to tighten the belt and get there.

Unidentified Analyst

Thank you. Congratulations on another good year.

Jim Judge

Thank you.

Operator

And our next question will come from the line of John Peckham with Pioneer Investments. Please proceed.

John Peckham - Pioneer Investments

Hi. Any updates on the energy mitigation and (inaudible)?

Jim Judge

No. John this is still six down the VPU. I do be nice to get that order out. But I just sympathize with our regulators here given the workload that they had coming out of that Green Communities Act and decoupling order, there has been 50 new rate dockets that have been opened in the last six months. You can imagine all these energy efficiency filings et cetera, and a lot of those 50 have statutory deadlines for a decision by a certain date. Unfortunately, our energy incentive case, even though it's all wrapped up, there is no sort of obligation to issue it within six months or even 12 months. We remain hopeful, we say to our customers we believe about a $134 million is a result of our efforts in getting the RMIs cancelled, but I can't report on any sort of progress or update at this stage.

John Peckham - Pioneer Investments

Does the guidance contemplate, are you guys receiving any of that this year.

Jim Judge

No, it does not.

John Peckham - Pioneer Investments

Okay. So that will be upside for this year.

Jim Judge

Correct.

John Peckham - Pioneer Investments

Okay. Thank you.

Operator

And our next question will come from the line of Peter Hark with Talon Capital. Please proceed.

Peter Hark - Talon Capital

Good morning Jim, good morning Phil. How are you?

Phil Lembo

Good. How do you do?

Jim Judge

Good. How are you Peter?

Peter Hark - Talon Capital

Good, thank you. I am sorry if you've addressed these, I jumped on a little late. First, if you didn't go through the components of the performance based resetting of the distribution case, what GDP number was used and what productivity offset number was used?

Phil Lembo

Hold on. The net number was 1.74%. So the GDP, the offset was 0.6. So when you add the offset back, the number that GDP 1 number was 2.34%.

Peter Hark - Talon Capital

Okay. Got you. And then, in the event for instance that GDP went south from year end, there was potentially a negative adjustment. Do you have the ability to increase the CTC revenue at that point?

Phil Lembo

Just to clarify, Peter. Our performance, the factor is not tied to GDP, and GDP is really sort of a quantity measure, our factor is tied to the GDP price inflator. So it's a price inflator type thing. And really when you look back over 60 years worth of data, the GDP is the negative seven times, but the price inflator has only been negative once in the 40s. So, we don't expect it to be negative for the full year. And you know the calculation is based on an average of four quarters in one year versus the average of the same four quarters period last -- in the previous year. And those quarters are the third and fourth quarter over one year in the first and second of the next. And when you look at our going forward number, the first part of that calculation is up about 4%. So, forecast we've seen and whatever don't really show any negative GDP price inflator number.

Peter Hark - Talon Capital

Thank you, Phil. So the third quarter and fourth quarter of '08, though at that first half of the calculation is a 4% increase already.

Phil Lembo

First quarter, Peter.

Peter Hark - Talon Capital

I got you. First quarter.

Phil Lembo

Only the third quarter's results have come out. You know, the fourth hasn’t been published yet.

Peter Hark - Talon Capital

Okay. Thank you very much. And so just taking that in the other components I believe you presented the one in 0.74% distribution rate increase, that’s about $60 million in revenues. Is that right?

Phil Lembo

60. No.

Jim Judge

No.

Phil Lembo

About 18.

Peter Hark - Talon Capital

Just 18?

Phil Lembo

Yes.

Peter Hark - Talon Capital

Okay. And then, maybe you can go through some of the other components, what your expectations are for increased transmission revenue. I guess the O&M savings, would that be 2% on, either that would be about $10 million, is that about right?

Phil Lembo

Yes.

Peter Hark - Talon Capital

Okay. And sales growth of 1%, how much is that?

Jim Judge

About $9 million to $10 million.

Peter Hark - Talon Capital

$10 million? Okay. And then the transmission piece? I'm sorry Jim.

Jim Judge

The transmission piece, Peter, we said we expect $100 million of CapEx, if you assume 50-50 with a 12.64% return; you get a certain revenue level there.

Peter Hark - Talon Capital

Okay. The incentive ROE has been affirmed for you, right?

Phil Lembo

For the --

Peter Hark - Talon Capital

For the transmission spending.

Phil Lembo

For the 345 project that we completed, yes.

Peter Hark - Talon Capital

Okay. And then the offsets to those revenue benefits, interest expense, depreciation taxes, what do you think there?

Phil Lembo

I mean our depreciation taxes have been kind of fairly consistent year-to-year. They go up; they'll be consistent with previous year's increases in that effect. And we really didn't give any specific guidance on interest expense at this point.

Peter Hark - Talon Capital

Okay. And then, maybe what your expectations are for the unregulated businesses for '09?

Phil Lembo

Flat, it's consistent with our rate.

Peter Hark - Talon Capital

So that's about $0.16, $0.17 per share? Actually it would be helpful, actually is if you had the fourth quarter breakout between electric gas and unregulated. Do you have that?

Phil Lembo

No, I think the unregulated number has probably been in the $11 million to $13 million range consistently in terms of contribution.

Peter Hark - Talon Capital

Okay. I must say a wrong number. Would you have that, Phil, for housekeeping purposes, what fourth quarter breakout between segments is?

Jim Judge

I don’t have it at this point. We will have it though. I can get that to you in the K.

Peter Hark - Talon Capital

Okay. And then, I guess there was a question about pension but I didn’t hear. I understand you’ve got recovery you know [directly] for that, but what is your expectation that for increase or not in pension costs and contributions to plan for ‘09?

Jim Judge

Yeah. I mentioned we were currently planning to put about $25 million in. We put $70 million into the plan in ‘08. It’s really from a financial impact given the way that the mechanism works. Cash flow is in significantly impact to us.

Peter Hark - Talon Capital

Okay. Okay, thank you Jim. Thanks a lot for your time.

Operator

And our next question will come from the line of Paul Patterson with Glenrock Associates. Please proceed.

Paul Patterson - Glenrock Associates

Good morning, guys.

Jim Judge

Hi, Paul.

Paul Patterson - Glenrock Associates

Just to a follow-up on [Daniel] question on the JB transition line.

Jim Judge

Okay.

Paul Patterson - Glenrock Associates

How much less is it, when you mention the PPA in the calls of the line and everything in it and just is this cheaper for customers? How much cheaper? Can give us certain idea about just sort of the delta that we’re talking about and if you could just refresh my memory about how many megawatts you guys think its going to be importing?

Jim Judge

It is currently 1,200 megawatts. There is a potential that it could actually expand a little beyond that and maybe to 1,400 megawatts but its characterized now as a 1,200 megawatt line. And the negotiations are coming, Paul. I mean the model here is that power will be delivered over that line and essentially Hydro-Quebec would pay the transmission cost and would deliver the power at a price that’s below the market price in the region. So the negotiations are far from complete here but if that’s not the outcome and the project would not go forward so we obviously would hope that the power would be delivered at a very attractive discount to the market and the Canadians I’m sure have a different perspective in terms of what they’d like to negotiate as pricing.

Paul Patterson - Glenrock Associates

Absolutely. And you said that the construction, you said I think was 2011 as when you thought it would began is that right?

Phil Lembo

Yes, 2011 to 2013. And again as I mentioned it’s very nicely with the very strong flow years that we have out their in our rate settlements so that’d be a good redeployment of that deferral recovery.

Paul Patterson - Glenrock Associates

And then the thousands start showing up like in 2013. Right.

Phil Lembo

We’re hopeful. Yeah as that would be a –

Jim Judge

As that would be probably a optimistic schedule but its just reasonable that could be the case if things went smooth in a regulatory front.

Paul Patterson - Glenrock Associates

Okay, great thanks to all guys.

Operator

And our next question is a follow-up question from the line of Steve Gambuzza with Longbow Capital. Please proceed.

Steve Gambuzza - Longbow Capital

Hi, I had a follow-up question on the PVR adjustment. Can you just review for example in for the 2009 PVR adjustments which goes into effect I guess beginning of 2009. What number you averaged to compute that? In terms of the quarters?

Phil Lembo

Sure.

Steve Gambuzza - Longbow Capital

It’s the GDP, it’s the PPI deflator, is that it?

Phil Lembo

Yes, the GDPPI correct.

Steve Gambuzza - Longbow Capital

GDPPI and what was the, which specific quarters that you averaged or do compute in your regulatory filings for 2009.

Jim Judge

We averaged the four quarters of that ran from Q3 ’07 TO Q2 ’08 and we compare that average with the four quarters prior to that.

Steve Gambuzza - Longbow Capital

So, is Q3 '07 to Q3 '08, so this is kind of two and so okay, and you compared the level of the absolute level of the index versus what it was in the prior period.

Jim Judge

I may given the specific numbers that with the public, the four periods Q3, '07 to Q2, '08 that’s four quarters, the GDPPI averaged 121.09.

Steve Gambuzza - Longbow Capital

121.09?

Jim Judge

Alright, and you compare that with the four quarters prior to that which would have been Q3, 2006 to Q2, 2007 and the average for those four quarters were 118.33.

Steve Gambuzza - Longbow Capital

0.33, so you got to basically, so you then compared the two and then you subtracted and offset of 0.6 from that.

Jim Judge

It’s correct.

Steve Gambuzza - Longbow Capital

And so in 2000 and beginning of 2010 it will be that Q3, '08 through Q2, 2009 that will return you to 2010 number.

Jim Judge

Correct.

Steve Gambuzza - Longbow Capital

Okay, thank you very much.

Operator

Ladies and gentlemen this concludes the question-and-answer session. I would now like to turn the call back over Mr. Jim Judge for closing remarks.

Jim Judge

Well thank you folks. I appreciate you joining us, your interest in the company and look forward to another great year for NSTAR in 2009. Thank you.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day everyone.

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