Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Pamela J. Keefe – Vice President, Chief Financial Officer & Treasurer

Robert H. Young – President & Chief Executive Officer

Analysts

Paul Ridzon - Keybanc Capital Markets

[Danielle Sykes – Sykes Research]

Paul Patterson - Glenrock Associates

[Mark Bishop] – The Boston Company

Central Vermont Public Service Corp. (CV) Q4 2008 Earnings Call March 13, 2009 11:00 AM ET

Operator

Greetings and welcome to the Central Vermont Public Service fourth quarter fiscal year 2008 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Pamela Keefe, Vice President, Chief Financial Officer and Treasurer for Central Vermont Public Service. Thank you. You may begin.

Pamela J. Keefe

Thank you. Thank you for joining us this morning. Our comments and responses to your questions may contain forward-looking statements. Our earnings press release and our Form

10-K both contain forward-looking statements and associated risk factors that you should consider. 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 earnings press release that we issued yesterday. This release appears on the Investor Relations section of our website at www.cvps.com along with the slides that will be referred to throughout today’s call.

Also during the call this morning we will be discussing earnings per share, which in all instances refers to diluted shares of common stock.

With me today is CVPS President and Chief Executive Officer, Bob Young. Bob will provide an overview of the company’s earnings and an update on corporate and strategic developments. I will then describe the financial results in detail and we will leave time to answer your questions before we conclude the call.

Now I would like to turn things over to Bob.

Robert H. Young

Thank you Pam and welcome everyone. Yesterday we reported 2008 earnings of $16 million or $1.52 per share of common stock. This compares to 2007 earnings of $15.8 million or $1.49 per share. We had a loss this year in the fourth quarter of $97 thousand or $0.01 per share compared to earnings of $5.3 million or $0.50 per share in 2007. While the quarterly results are disappointing, they reflect seasonal spending on our distribution system, a fourth quarter planned refueling outage at Vermont Yankee, and softening in the margin on resale sales. We are pleased with the annual financial results, especially in light of the tremendous turmoil on the financial markets and the worsening economy during 2008.

In a few minutes Pam will describe our financial performance in detail, but before we get to that I’d like to share my thoughts with you about the year just past, our progress in these extraordinary times, and our future direction. Despite the difficult conditions of the past several months, CVPS made considerable progress last year, continuing our strategy to improve customer service and reliability; improve financial strength; and plan for future power supplies.

To this end in 2008 we successfully completed a first mortgage bond issuance; gained approval of our alternative regulation plan; and settled our subsequent rate request with the Vermont Department of Public Service; successfully completed a stock offering; reached a new five year union contract with the International Brotherhood of Electrical Workers; met or exceeded our 17 service quality standards; and completed a massive service restoration following the most costly storm in CVPS history.

That would be an impressive list of accomplishments in any year, but it is especially remarkable given the current economic conditions. Many of those achievements have occurred since our last earnings teleconference, and I would like to share some of the details now. As shown on Slide 2, in January the Vermont Public Service Board approved our settlement with the Department of Public Service to leave CVPS’s rates unchanged to start 2009. According to the Edison Electric Institute, our rates remained the lowest among the major utilities in New England. We are now operating under our alternative regulation plan, which will provide for quarterly power cost adjustments, an annual base rate adjustment, and an annual earnings sharing mechanism. The first power cost adjustment will be made on July 1, 2009. CVPS will submit a base rate filing by November 1 each year.

In November we completed a successful stock offering issuing nearly 1.2 million shares of common stock at $19 per share which raised $21 million net of issuance costs. These proceeds, combined with our $40 million credit facility, will be used to continue our strategy of making significant core infrastructure investments and equity investments in Transco, commonly referred to as VELCO. This in turn will improve system reliability and grow shareholder value over the long term.

Turning to Slide 3, we are very pleased to have reached a new five year contract with the International Brotherhood of Electrical Workers that took effect January 1. The contract affected 218 unionized employees at CVPS. This is the longest contract term in company history and the fourth straight contract approved on the first vote.

I’ve always had a deep respect for our employees’ tenacity and capabilities, and that respect deepened in December when we experienced a devastating ice storm in the southern and eastern regions of our service territory, the most rural areas we serve. This storm was the most costly in company history, topping the April 2007 storm at a cost of $5.1 million. 31% of our customers lost power during this storm, which affected much of the Northeast. We restored service to 70% of customers on the first day and all service was restored within one week. Experiencing two storms of epic proportions two years in a row is unprecedented. We received uniform praise for our efforts from customers and the Vermont legislature issued a declaration in appreciation of our superior performance. On Wednesday I attended the EEI CEO meeting where CVPS was presented with the Emergency Recovery Award for the second straight year. On a lighter note, although I am very proud of our work, I hope we are not in a position to receive this award for a third time. Not only did our employees rise to the occasion when called, they performed consistently in 2008, remaining focused on daily customer service which insured that CVPS met or surpassed all 17 of our service quality standards for the fourth straight year.

Meanwhile, we continue to make progress on securing our future power supply as outlined on Slide 4. In November CVPS and other Vermont utilities issued two power resource solicitations. In one RFP we jointly sought to purchase up to 100 megawatts of energy, up to 40 megawatts each for CVPS and Green Mountain Power and 20 megawatts for Vermont Electric Cooperative. In the second RFP, CVPS sought an additional 100 megawatts and Green Mountain Power an additional 50 megawatts contingent on the outcome of Vermont Yankee relicensing and contract negotiations. We expect to issue additional periodic RFPs as needed to stagger the start and end dates of various portfolio components.

Bids from dozens of companies throughout the Northeast and Canada were received in December. Bidders included power marketers, energy developers, existing and to-be-built power plant owners, and financial institutions. They offered more than 1,000 megawatts from a variety of sources. Some of the bids are quite attractive, including positive environmental attributes and many offer significant base load options. We have narrowed the field from these offers and expect to select the first round of contract winners later this month. The contingent RFP selections will be announced in mid-June.

We also continued to negotiate with Hydro-Quebec and Energy Vermont Yankee on new contracts to prepare for the expiration of our current contracts with them. Talks with Hydro-Quebec continue productively and we believe a contract proposal will be ready later in 2009. Securing a contract with Energy Vermont Yankee will be less clear-cut however. The relicensing of plants has become highly politicized. It is unlikely that the Vermont legislature will vote on the plants’ continued operation this year. However, Energy Vermont Yankee officials have publicly stated that they intend to issue a new offer to the Vermont Utility soon, which could sway political support. We remain open and interested in purchasing power during the long term contract with Energy Vermont Yankee given appropriate terms.

Due to the considerable interest in our first two power supply RFPs, we are confident that ample resources are available to provide future power supply to our customers. There are many options available and we will work to determine the best mix of attributes for our customers including cost, reliability and environmental impact among others. We will remain proactive on this front throughout the year and I look forward to sharing developments with you on future calls.

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

Pamela J. Keefe

Thanks Bob. Please refer to Slide 5 for a summary of our annual and fourth quarter financial results. CVPS’s 2008 annual net income rose by $581 thousand or $0.03 per share compared to 2007. The primary drivers were increased revenues resulting from a 2.6% retail rate increase effective February 1, 2008; improved margins on resale sales through the summer; and increased earnings from affiliates, primarily earnings from Transco.

Resale revenues increased $9.7 million as a result of higher average prices and more power available for resale because of lower retail sales volume; higher output from our hydro facilities and independent power producers; and better production from Vermont Yankee this year. Purchased power expense increased $4.7 million, principally due to increased purchases from independent power producers at higher prices and from increased Vermont Yankee planned output that we purchased at favorable rates under a long term power contract.

Other operating expenses increased $8.3 million. The largest component of this line item was higher transmission related expenses due to higher rates under the New England Transmission Tariff and costs from Transco for its capital projects and increases in its operating costs. We also had increases in tree trimming; employee related costs; net regulatory amortizations and reserves for uncollectible accounts; and lower professional service fees.

Equity and earnings of affiliates rose by $9.8 million year-over-year. The lion’s share of this increase was from earnings on the $53 million investment we made in Transco in December, 2007.

We had a loss in the fourth quarter of $97 thousand or $0.01 per share compared to earnings of $5.3 million or $0.50 per share in 2007. There were three principal reasons for the large decline versus last year. First, the Vermont Yankee plant had its’ scheduled refueling outage from mid-October to mid-November in 2008 with no corresponding refueling outage in 2007. That resulted in a decrease in resale revenue of $3 million year-over-year. A related variance is that purchased power expenses increased $592 thousand related to higher short term purchases for replacement power during the VY refueling outage; an increased output from independent power producers, which consists primarily of hydro facilities whose output levels are dependent on weather conditions.

A second major reason for the fourth quarter decline was the substantial amount of catch up or seasonal spending on our distribution systems, particularly tree trimming. Lastly as Bob mentioned we had a major ice storm in December at a cost of $5.1 million. We asked our regulators to allow us to defer the incremental portion of these costs or $4.1 million for recovery beginning on July 1, 2009. In February our request was approved. Absent our ability to defer these costs, our earnings obviously would have been lower. The cost of the storm, increased tree trimming expense, and an increase in transmission by others expense are the principal sources of the $4.1 million increase in other operating expenses year-over-year.

Equity and earnings of affiliates rose by $2.4 million, again as a result of the $53 million investment we made in Transco in December, 2007. For a more comprehensive analysis of the company’s annual and fourth quarter financial performance, please refer to the earnings release we issued yesterday.

The company’s cash position shown on Slide 6 was $6.7 million at December 31. Since we raised approximately $21 million in November through our common equity offering and increased our revolver from $25 million to $40 million, in addition to the $60 million of first mortgage bond issued in May, we feel our liquidity position is stable and we do not believe it will be necessary to raise additional capital in 2009. Thereafter we will need 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.

We made an additional $3.1 million investment in Transco late in December. That brings our combined investment in Transco and VELCO to $99.1 million. Our next opportunity to invest in Transco will be in the fourth quarter of 2009, but the timing and the amount, which we currently believe will be about $20 million, are subject to change.

On February 24 we announced our 2009 earnings guidance range of $1.40 to $1.60 per share. While this range is wider than we have given in the past, we feel this is prudent in light of current extraordinary economic conditions. The earnings sharing mechanism in our alternative regulation plan should function to keep us within this range. CapEx for 2009 should be around $32 million, excluding the Transco investment, and the effective tax rate should be around 37 to 38%.

With that I would like to turn the call back over to Bob.

Robert H. Young

Thanks Pam. Despite challenging economic conditions and the devastating storm last quarter, we persevered; continued to make solid progress on our long term strategic plan; and met our earnings estimate. Throughout 2009 we will remain focused on our stated plan and long term goals, which we believe will deliver value to shareholders and customers.

Let me review the broad features of our plan, which are outlined on Slide 7. We are continuing to execute our accelerated capital plan and 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 continuing to improve our financial strength, which will help us restore our credit rating to investment grade. Finally, we are engaged in collaborative planning opportunities and contract negotiations that will help us create an affordable, reliable and environmentally responsible electric future for Vermont.

As we have followed this path over the past several years it has proven to be a conservative and productive approach that we believe will serve the best interests of our company, shareholders and customers in the years to come.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Paul Ridzon - Keybanc Capital Markets.

Paul Ridzon - Keybanc Capital Markets

To what extent have you bid self-build options into the RFPs?

Robert H. Young

We haven’t bid self-build options. I think I’m interpreting your question properly. These are all basically purchase power RFPs. What we have said, however, is that as we think about our power supply longer term, and by that I mean in the next five to ten years, that we are actively considering whether we should either on our own or jointly perhaps with some of the other Vermont utilities, build some new generation here in the state of Vermont. And there are some good reasons why that might be attractive. Attractive to us certainly from a rate base standpoint, but attractive to the state of Vermont on the basis of jobs and tax base and that kind of thing.

So that is under active consideration here, but in frankness we are as we continue to say to the marketplace, very active in restoring our own system infrastructure and VELCO investments as a shorter term priority for us. I hope that answers your question.

Paul Ridzon - Keybanc Capital Markets

Yes it does. What would you envision if you choose to go down that path? Would it be biomass or?

Robert H. Young

Well it certainly – I think the most logical things to consider here in Vermont, all things considered, would be biomass or a gas fired unit. We’d probably be looking for something that had base load characteristics.

Paul Ridzon - Keybanc Capital Markets

And just as a reminder, where was the treasury against what’s which ROE gets tweaked on the last update?

Pamela J. Keefe

I can’t remember what the treasury was, but I know that the date was 10/15 and it had gone down year-over-year by 88 basis points and so the effect on our ROE was the 44 basis points.

Robert H. Young

Are you talking about which duration treasury? Or did Pam answer your question?

Paul Ridzon - Keybanc Capital Markets

That was actually my next question.

Robert H. Young

Okay.

Paul Ridzon - Keybanc Capital Markets

Five year?

Pamela J. Keefe

The ten year.

Paul Ridzon - Keybanc Capital Markets

And then what’s the gap between your regulated ROE and your [gap] ROE?

Pamela J. Keefe

It’s typically about 150 to 200 basis points.

Operator

Your next question comes from [Danielle Sykes – Sykes Research].

Danielle Sykes – Sykes Research

I was wondering the new contract that has been signed, how much of an impact will it have on you and spending for 2009?

Robert H. Young

Danielle, are you talking about the union contract?

Danielle Sykes – Sykes Research

Yes. Yes.

Pamela J. Keefe

Let’s see. Really it doesn’t have a large impact.

Danielle Sykes – Sykes Research

Okay. So it is just something that was cleared up? It is not going to have a massive impact on ’09?

Pamela J. Keefe

Absolutely not. No.

Danielle Sykes – Sykes Research

And if I understand, your earnings were more affected by the Vermont Yankee in the fourth quarter by the refueling outage, the storm, most of the storm costs were deferred. Is that what you implied in the results?

Pamela J. Keefe

That’s right.

Danielle Sykes – Sykes Research

Okay.

Pamela J. Keefe

If you’re looking at year-over-year, in the fourth quarter this year we had much more storm activity than the fourth quarter last year. Last year our storm activity was principally in April and August.

Danielle Sykes – Sykes Research

But in terms of the fourth quarter earnings per se, the major reason for the sharp drop was really the refueling, the storm damage had limited impact or was that also a large portion?

Pamela J. Keefe

The largest portion was due to the refueling outage.

Danielle Sykes – Sykes Research

And when the deferred portion is going to be recovered over – you will recover the cash over a period of seven years?

Pamela J. Keefe

Over 12 months.

Danielle Sykes – Sykes Research

And as far as the contract that you are anticipating in terms of Hydro-Quebec and do you anticipate that the – I mean, since the type of power is already [on] $0.068 do you anticipate much of an increase? And is the intent to stagger actually that increase over time?

Robert H. Young

Well, I think the first comment I have to make to you is that we’re under –

Danielle Sykes – Sykes Research

[Inaudible] Yes.

Robert H. Young

And I really can’t say much about the contract terms at this point in time since we’re still negotiating a lot of them. I think I can make a generic comment that obviously it’s all likelihood that any contract that we enter into is going to be around market and would over a period of time probably follow market in large measure. That’s only sort of rational negotiations.

Danielle Sykes – Sykes Research

Right. Right.

Robert H. Young

I think we’d be able to answer more detailed questions for you as we actually get the contracts done and we can actually talk about the specifics. So I apologize. I can’t really fully answer your question and hopefully in the next six months or so we’ll be able to be more forthcoming about that. We’ll certainly be able to say more about the contracts we expect to sign under these two RFPs within the next several months. So we’ll be able to give all of you a much better sense of some of the specifics here in a reasonably short period of time.

Danielle Sykes – Sykes Research

And given the – I’m assuming that the EEI forecast for VELCO investments as well as your projected capital spend has not changed that much since the EEI?

Pamela J. Keefe

That’s right. It has not.

Danielle Sykes – Sykes Research

And what is the status of large meters? Is it beginning to ramp up in your region? What is the status of that?

Robert H. Young

Yes. Very much so. We at CV have been working on the whole issue of Smart Grid for several years. We are in the final stages of trying to negotiate a memorandum of understanding with our Department of Public Service for the implementation of a major Smart Grid program here at the company over the next three or four years. We expect that we will have an MOU. We would take that to the Public Service Board for approval later on this spring and that we, all things being equal, would begin to spend some significant capital dollars on that project starting in 2010.

Danielle Sykes – Sykes Research

Any status on the case you filed and are there any specific dates we should watch for?

Pamela J. Keefe

The rate case?

Danielle Sykes – Sykes Research

Yes. The review of your rates, which you said should be decided by July 1.

Pamela J. Keefe

We did settle that case and so rates are unchanged at January 1.

Danielle Sykes – Sykes Research

Okay.

Pamela J. Keefe

But we do know that the power cost deferral that will get rolled into rates on July 1 and as well we’ll have our first power cost adjustment on July 1 as well.

Operator

Your next question comes from Paul Patterson - Glenrock Associates.

Paul Patterson - Glenrock Associates

The 150 to 200 basis points that you talked to Paul Ridzon about in terms of the difference, just walk me through this. You’ve done a 9% sort of gap ROE based on basically $1.60. Now how would that translate into a regulatory ROE? Roughly speaking. I mean, I realize that there’s some variation there, but –

Pamela J. Keefe

Right. Well there are some – not everything makes its way into a rate filing. So for example, you know, lobbying; donations; incentive compensation; performance shares; those things just never make their way into a rate filing. And then when you think about it, especially in our current situation where we are issuing – you know, we’re raising capital to invest in our systems, not all of those projects meet the minimum measurable criteria at each tier. So we’ve got a bit of lag there. So that will, because those aren’t even rate based they don’t earn a return. So it’s things like that that kind of chip away at it.

Paul Patterson - Glenrock Associates

I guess what I’m wondering is that on a more normalized basis what – would we look at the range that you guys [entered] the sharing range and what have you? Where would the $1.40 to $1.60, where would that sort of place you in terms of your regulated ROE and that sharing range?

Pamela J. Keefe

That places us – the $1.40 is pretty much at the bottom. So, you know, we wanted to – you know this year is just kind of an odd year in the market and everything. So we did give – we did purposely give a wider range and we wanted to give a sense of what the floor might look like, but our actual earnings could fall anywhere within that range.

Paul Patterson - Glenrock Associates

How much did you guys invest in VELCO in 2008?

Pamela J. Keefe

$3.1 million.

Paul Patterson - Glenrock Associates

And you were planning putting in about $20 million in 2009? Is that right?

Pamela J. Keefe

That’s right.

Paul Patterson - Glenrock Associates

And then with respect to the Vermont Yankee saga that’s going up there, you mentioned that you guys might be getting some contract terms I guess offered pretty shortly, but it seems like the legislature really doesn’t want to address this in 2009. I guess what I’m wondering is why would that be? I mean, it seems like this is one of the big hang-ups is the contract, at least from what I’m reading in the press which obviously is suspect to a certain degree obviously. But just in general, it seems like that seems to be one of the big hang-ups that they have is obviously the decommissioning issue and just other issues associated with Vermont Yankee performance. Could you just give us a little bit more of a flavor as to what’s going on there?

Robert H. Young

Sure. I think – well first of all I still think that a contract and a good contract Vermont is the lynchpin to what happens here in the legislature in terms of Vermont Yankee’s future. And so the fact that the legislature is not going to arguably have an up or down vote on Vermont Yankee’s future this year is not totally surprising, because the primary piece of evidence which is a new contract is not yet in place.

Paul Patterson - Glenrock Associates

But it will be soon though it sounds like. Am I wrong?

Robert H. Young

I think we will certainly – I am confident that in the very near future we will again be looking at a new proposal from [Entergy] that will allow us to, I hope, move on to some contract terms that are acceptable to everybody. And I still remain hopeful about that. There are certainly other issues out there that the legislature is concerned about. Certainly one of them is the overall safe operations in the plant. I think that there have been strides made to demonstrate that historically the plants run well and the legislature at the end of the day will have its say on that, but I think on balance the evidence is pretty good.

There is this issue of decommissioning. Entergy is going to have to file just by law with the NRC a decommissioning status report here I think by the end of April and I would think that if they are substantially under funded then they would be forced by federal regulators to do something about that. That happens to be a real sticking point with the Vermont legislature as well. And so that could play itself out over the course of this legislative session over the next few months. But we will see how that plays out. But I think at the end of the day the real answer of whether this plant is going to remain open or not will probably not be determined until the next legislative session.

And from our power planning standpoint, that’s a very critical time for us. We can live without that knowledge now. We prefer to be in a different position but we’re not, but just as long as we have an answer by next spring then we can go ahead in a prudent way and do what we have to do if that plant’s not there. And again, as we said in our remarks, we have already done a contingent RFP. We have results from that. So we are preparing prudently for an eventuality that the plant may not be there after 2012.

Paul Patterson - Glenrock Associates

And just the RFPs that you guys are looking at right now, could you give me a flavor as to what the – I’m sorry, are those full requirement contracts?

Robert H. Young

Are they full requirements contracts?

Paul Patterson - Glenrock Associates

Yes. Are they that or are they blocked or?

Robert H. Young

In frankness I’d be happy to answer that perhaps on the next call, but right now again it’s the same with HQ, we have confidentiality agreements with the finalist bidders here. We’re still talking to them and working with them and so I think it would be inappropriate and premature for me to talk too much about the details.

Paul Patterson - Glenrock Associates

Okay.

Robert H. Young

I will say this. We went out with the idea that we would try to get something in the marketplace that would mirror the kind of power, the characteristics of power we would get out of Vermont Yankee, so that could give you some sense of what those contracts might look like.

Operator

Your next question comes from [Mark Bishop] – The Boston Company.

Mark Bishop – The Boston Company

First of all, you said $1.40 would represent the low end of your regulated ROE. What would be the high end? If you get the high end of the ROE, you actually achieved the most you could achieve, how much EPS would that be?

Pamela J. Keefe

That would be in the high $1.70. That’s if we’re at the very top of our [stand].

Mark Bishop – The Boston Company

And what is the rate base now?

Pamela J. Keefe

I didn’t bring that with me. I can call you with that. I don’t have it with me.

Mark Bishop – The Boston Company

And then on the power procurement, now you have a power adjustment that starts when? In July, right? So if it costs you more to buy power you’ll get it adjusted annually. Is that right?

Pamela J. Keefe

It’s adjusting quarterly so the first measurement period will be the first quarter of 2009. There is a $315 thousand dead band each quarter. So then if net power differs outside of that dead band then the adjustment would occur beginning on July 1 for the first quarter.

Mark Bishop – The Boston Company

Does that represent the entire risk on say Yankee, Vermont Yankee? Why would I the shareholder really care so much about what happens with Yankee? Let’s say it just goes away, you and you’ll get power in it or you’ll get a new deal with Quebec and it costs you a lot more money. Does that represent a risk for the shareholders particularly or?

Robert H. Young

I don’t think it does because no matter what resources we buy going forward as long as the alternate scheme is in play that would be covered in effect the formula we have under [inaudible]. The reason that Vermont Yankee remains attractive to us is because there is a revenue sharing agreement with the utilities for any power that’s sold out of that plant over $61 a megawatt hour over the first ten years of relicense production, so that could potentially have real value to Vermont. So that’s one reason that it’s –

Mark Bishop – The Boston Company

You’re getting that now?

Robert H. Young

No, we’re not getting that now. It would be part of a new deal that was negotiated however when we sold the plant.

Mark Bishop – The Boston Company

Okay. So hold on. So right now you’re getting nothing.

Robert H. Young

Right now we have in effect a power contract out through 2012, but it’s very favorably priced. We currently take production from them at about $41 a megawatt hour and it’s pretty stable there for the next number of years. So compared to where the market’s been since we sold the plant, it has been a very, very [proficious] and favorable investment, power investment for Vermont consumers. But going forward the idea of having the plant operating is important for a number of reasons. One, because of this potential revenue sharing agreement I mentioned. Secondly, because the plant has a permanent employee base of about 500 to 600 employees, well paid employees, and in this day and age in the state of Vermont if you lost those jobs it would be a real kick to the Vermont overall economy, so that’s important. It provides significant tax base to the state and to the communities down in southern Vermont.

And thirdly, from a portfolio standpoint, having base load that is climatology – from an environmental standpoint, pretty positive for us in terms of emissions is also very attractive. So we are very hopeful that we can get a contract that makes sense for Vermont and because with it and all those other attributes, we think it would be a very valuable part of our portfolio going forward.

Mark Bishop – The Boston Company

What is the revenue sharing thing? You’ve already got part of the agreement. It kicks in after 2012, is that right?

Robert H. Young

When we sold the plant, there was a part of the sales agreement was that if the plant was licensed after 2012 and ran, that for the first ten years for any revenue generated out of the plant at over $61 a megawatt hour, that revenue would be split between Entergy and the Vermont utilities.

Mark Bishop – The Boston Company

Anything over $61 per megawatt hour.

Robert H. Young

That’s correct.

Mark Bishop – The Boston Company

And how many megawatt hours do they produce on average?

Robert H. Young

They produce somewhere around about 600 now or so in their upgraded state.

Mark Bishop – The Boston Company

600 megawatts?

Robert H. Young

600 megawatts. So let me just try to put it in perspective. Of course power prices vary all the time and if you look at any forward curve, that forward curve can change overnight. But we have had estimates done by our regulators here in Vermont that would indicate that based on their forward curves this – the value to Vermont of this revenue sharing agreement could be anywhere from several hundred millions of dollars over the ten years to over $1 billion, depending on what kind of forward curve you’re looking at for the price of power in New England.

Mark Bishop – The Boston Company

Is the split half? Do you get half of this?

Robert H. Young

That would be basically the value to the utilities.

Mark Bishop – The Boston Company

What percent do the utilities get? Do the utilities get half and Entergy gets half of the amount over $61?

Robert H. Young

Half and half.

Mark Bishop – The Boston Company

50%. And then what percent of that 50% would go to you?

Robert H. Young

That’s still being negotiated. That’s a rather complex issue and it depends in part on who are considered to be the utilities that receive this money. Is it just the Vermont utilities? Is it all the former owners of Vermont Yankee? So that bears some issue there. And then there’s a question even in the context of Vermont, no matter how much we get in an absolute sense would it only be say Central Vermont Public Service and Green Mountain Power who got that revenue? Or would it be split more broadly in Vermont? And those are issues that are sort of on the table.

Mark Bishop – The Boston Company

Now even if you got that money, though, I would assume the state would just [clod] back. It’s not going to allow you to earn more than you’re allowed ROE. Is that correct?

Robert H. Young

It’s very clear from the beginning that this clause was for the benefit of our rate payers. That was how we negotiated it five, six years ago. Clearly the money would go to the benefit of our customers.

Mark Bishop – The Boston Company

So I assume then that they would just lower rates and so you wouldn’t even be any – it wouldn’t even help you be more likely to earn the high end of your ROE band going forward. It would just – you’d be – it’d kind of be neutral to you. Is that fair? As a company, from a profit standpoint.

Pamela J. Keefe

I think that’s true.

Robert H. Young

Yes, I think that’s true, too. I really hadn’t thought that through but I think that’s generally speaking the case. I mean if it fundamentally goes to the benefit of the customers, then I would have to think through with even if the margins in some way had helped us, from an earnings standpoint.

Mark Bishop – The Boston Company

So you would just get less in terms of your rates would be lowered.

Robert H. Young

That’s the fundamental benefit is that it arguably could be used to keep rates down.

Operator

Your next question comes from Paul Ridzon - Keybanc Capital Markets.

Paul Ridzon - Keybanc Capital Markets

When is the next VY refuel?

Pamela J. Keefe

Let’s see. It generally happens every 18 months, so it would be –

Robert H. Young

October of ’10 I believe.

Paul Ridzon - Keybanc Capital Markets

And the storm costs were $5.1 million but you deferred $4.1?

Pamela J. Keefe

That’s right.

Paul Ridzon - Keybanc Capital Markets

So by logic I guess you absorbed $1 million of the storm costs in ’08.

Pamela J. Keefe

In the – for that particular storm. Right. Absorbed $1 million of that particular storm cost in 2008, correct.

Paul Ridzon - Keybanc Capital Markets

And why didn’t they let you defer the whole thing?

Pamela J. Keefe

Because we had to look at the extent to which storm costs actually were greater than those that were imbedded in rates. And we were allowed to only defer the incremental portion.

Paul Ridzon - Keybanc Capital Markets

Oh, so you would have spent that money on OEM but just in a different manner, or different – is that the right way of looking at it?

Pamela J. Keefe

No. I guess what I’m trying to say is – I’m just making up numbers. Let’s say that in our rates we assumed that we would spend $6 million for the year on storm costs and when we looked at where we actually were and where that last storm hurt us, let’s say we were actually at $8 million in storm costs, we were allowed to defer the delta or the $2.

Robert H. Young

Stated another way, that $1 million was already in our cost of service. So you couldn’t – you’re recovering it once. You can’t turn around and ask them to defer and let you recover it a second time.

Paul Ridzon - Keybanc Capital Markets

So you hit your storm budget for the year. Anything over that was –

Robert H. Young

That’s correct. And in effect what they did was they gave us the overage, the incremental cost beyond what was in our cost of service.

Operator

Your next question comes from Danielle Sykes – Sykes Research.

Danielle Sykes – Sykes Research

The $1.70 that would be at the very high end of your potential return, this assumes no additional storms, normal weather, so what would make it so much better? Is it the cost cutting or any other items?

Pamela J. Keefe

Well, it would assume yes, that we’re able to let’s say lower expenses from any source except for net power. But let’s say that storm activity is less or other operating expenses are less, or we’re able to keep each quarter’s dead band of net power costs so that all of those things in aggregate would allow us to hit the upper end of our earnings sharing stand.

Danielle Sykes – Sykes Research

And so from your point of view of returns, you would be hitting the high end of it.

Pamela J. Keefe

That’s right.

Danielle Sykes – Sykes Research

The terms of a new [certificate] issuance, given your current CapEx estimates, do you think that you would need equity over the next year?

Pamela J. Keefe

We definitely will not need any in 2009. Towards the end of 2010 we will need some additional capital and we will be seeking to keep ourselves as I indicated at about 55% equity and 45% debt. So we’ll be going out for both debt and equity.

Danielle Sykes – Sykes Research

Do you have any sense of the size of the equity issuance you may need at that time or not yet?

Pamela J. Keefe

We’ll have more to come on that as we get a little closer.

Danielle Sykes – Sykes Research

Is the CapEx towards the larger based on the decisions by the commission regarding new generation? Or that is way into the future?

Pamela J. Keefe

Yes. That’s way into the future.

Operator

Ladies and gentlemen, there are no further questions at this time. I’ll turn the conference back over to Mr. Robert Young for closing comments.

Robert H. Young

Well, again, I thank you all very much for participating with us today and we’d just like to remind you that both Pam and I will be hosting our annual Analysts Luncheon in New York on May 19 and I would hope we would see all of you there. Thank you very much and if you do have further questions today at any point please feel free to call Pam or myself. Thanks very much.

Operator

Thank you. To access a replay of this teleconference please dial 877-660-6853. International dialers can dial 201-612-7415. The account number will be 286 and replay ID number 314464. This concludes today’s teleconference. All parties may disconnect now.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Central Vermont Public Service Corp. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts