Northeast Utilities (NU) Q3 2010 Earnings Call November 1, 2010 10:00 AM ET
Gregory Butler - Senior Vice President and General Counsel
Company Speaker -
Charles Shivery - Chairman, Chief Executive Officer, President and Chairman of Executive Committee
Leon Olivier - Chief Operating Officer, Executive Vice President and Chief Executive Officer of Western Massachusetts Electric Company
Jay Buth - Vice President of Accounting and Controller
Jeffrey Kotkin -
David McHale - Chief Financial Officer and Executive Vice President
Well, thank you for joining us. We appreciate your joining us at this very early hour, though I think folks in the east coast may not [indiscernible] in bed early. I'm Jeff Hodgkins, I'm Vice President of Investor Relations for Northeast Utilities. And what I want to do is introduce some of the folks in the room from our company from NSTAR and NU who will be speaking, and then we'll go to the Safe Harbor and then I'll turn it over to the company CEO.
So let me start, John Valera from NSTAR, who's seating in the front row here. I represent as IR and also financial reporting.NSTAR Treasurer, Phil Lembo is right over here. Randy Shoop, the NU Treasurer is over here. And Sue Weber our Assistant Treasurer is right over there. So again, thank you very much for joining us this early morning. We're really excited about this presentation, and we hope you are as well. I'm just going go through a little bit in terms of the Safe Harbor and this for the folks who are on the webcast because this is being webcast.
This presentation includes statements concerning our expectations, beliefs, plans, objectives, goals, strategy, and assumption for future events and future and future financial performance or growth and other statements that are not historic facts. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have some Safe Harbor slides on the merger in the front of the deck and before each company's financial presentation, we also have Safe Harbor in there. So we urge you to take a look of that.
So with that, again, thank you very much, and I just want to turn this presentation now over to Chuck Shivery, NU's Chairman, President and CEO.
Jeff, thank you. Thank you for joining us. This is somewhat an early hour. But we have a multi-faceted presentation for you today. We're trying to do a number of things, the first and probably, the foremost, of course, is Tom and I would like to spend a little more time talking about the merger. We had a lot of conversations since we announced it, but there are some questions that some of you have asked. We'll try to hit those head on. Today, but clearly, we'll both be around for a few days and give you the opportunity to talk to us privately, if you'd like.
The second thing is we both had our earnings release is out. You saw that the third quarter for both companies was very good. NU also increased its guidance for 2010. And so, we'll get this later on in the presentation. We'll have Dave Michael and Jim Judge talk a little bit about what for the quarter for each of our companies.
And for NU, I know a lot of you views this morning as a way to get updated on [indiscernible] of the major projects. So when Tom and I just finished talking about the merger and lease, we're going to spend some time give an update on the status of the capital expenditures around some of the major projects. So that's what we're going to try to accomplish today . Please ask questions as it had the opportunity ended like to get this discussion.
So if you go to Page 5. We've spent a lot of time talking to a lot of you privately, but this really is compelling combination. And I would tell you that I have not met anyone that hasn't had logically this makes sense. This strategic for the industrial logic its combination is compelling. We think it's going to be tremendously exciting new company at closure. We talked about closure being nine to 12 months away. You'll here Tom, being, a little bit optimistic about. I ,et's try to do it on the nine-month side. I think we can actually accomplish that, and I think that's where we should be headed. We have a significant transformation opportunity to Nu. We've talked to you about those over the last number of years, and we combined that we the balance strength that we have with NSTAR and the cash flow it allows us to really expand on those projects in a way that is more effective from a financial standpoint.
This new company is larger. It will be the 15th to the 17th largest utility in the country, depending on how you measure it. And it is more diverse and much better position to support the economic growth and renewables in New England. I think and you probably said this before, New England is an inflection point. They've got Reg E Requirements. They've got RPS requirements. And you play those out over the next few years, we need to do something to make that happen. I think there's no company who is going to be positioned in a way that it will be able to help make that happen for the benefit of not only our stockholders but for the benefit of the customers and for the region. This is clearly accretive to earnings in year one, and we think provides not only increased earnings and dividend potential but an enhanced total shareholder return. The service quality capabilities enhanced is the largest customer base in New England. You've seen a map many, many times that shows the low centers in New England, it's Boston, it's Connecticut. As the two companies have a significant portion of that New England population.
And then a highly experienced and complementarity leadership team with a proven track record. You've heard us talk a lot about the similarities of these two companies. We've worked together for a number of years. Restoration, as we've had storms. [indiscernible] NSTAR send crews to our service territories. So we've worked together. We know how that work. And the Hydro-Québec project is just one more example and probably the most used example of the two companies working together. And I think as that proven track record showed, this then becomes the next logical step in that process.
If you go to the next slide. You've seen this before. We expect to close nine to 12 months New headquarters in both [indiscernible] and Boston. Tom will spend a little bit more time processing that [indiscernible]. NU will be the company's name, the consideration is 100% NU shares. The exchange ratio as you can see is 1.312. Shares for NU per NSTAR share is about $56.44. The dividend increase will be about a valid 20% increase for NU shareholder. And [indiscernible] per NSTAR shareholder, and from a government stamp on, i will become the non-Executive Chairman at this point of closure. Some will be president and CEO. There will be 14 board members. Tom and I will be six independent the board.
So as you look at this, this truly is a merger of equals. And we think you'll see that from the government standpoint, from the management standpoint is about any perspective, this is just a valid balanced as an interesting [ph] Base.
The benefit to the NU share of shareholders, approximately 20% dividend increase, when you calculate it today or when it calculated projected at the time of closer. The cash flow increased to eliminate the equity issuance. We talk to you from NU standpoint, by the fact that we expected to have about $300 million equity issuance in 2012. Essentially, that equity issuance goes away. And for the foreseeable future as well up at our five-year plan, we don't see any equity issuance in that plan.
Likely, credit upgrades, obviously, the benefit of reduction in debt issuance and lower interest rates, we think that will be helpful. Increased market liquidity, number of you have difficult time buying either us or NSTAR because of the size of the organization. So if we put this into together, the market liquidity obviously expense dramatically and gives you the opportunity to bike shares in a much lower company. Increased opportunities to reduce cost over time, and this is one of those things that you ask us a lot. And this is the form of many different kinds of questions, but it is basically [ph] of synergy. And if you could tell us exactly how much there is day one, day two and day three. That would be appreciated also.
But this merger is not predicated on synergies. It's predicated on providing growth to the region and being able in a way that neither one of us can, right now, answer questions and provide solutions for our customers. That ultimately will help the shareholders of this combined company.
Now clearly if we do that, there will be opportunities for improvement in the effectiveness of these organizations. There will be a change in the compensation, composition of some of our employees, but we would expect to handle most of that through voluntary attrition and through retirement. There will be best practices. They will benefit of putting these large systems that we use today. So there will be the ability to reduce cost over time, that will flow through the benefit of not only the customers but also through our shareholders and as I said earlier, the ability to achieve a higher earnings [indiscernible] interest rate.
We have talked to you about it being accretive, we probably didn't give you exact numbers on each of one of these. We're going to point out some of the things to take us from some of the 6% to 9% growth rate that we previously were to something toward the upper end of that 6% to 9% growth rate. Obviously, the additional shares are negative to that. But for that, we get NSTAR's earnings growth, which is significant. We get the avoidance of the equity issuance that we just talked about, lower financing costs, less current parent debt and the implementation of best practices. So as we look across the spectrum for the next few years, they were going to be many real benefit to this merger in a way that will allow us to increase our earnings and ultimately our dividends at a rate that was higher than we thought we could do before and certainly at a rate that's higher that even one of the stand-alone companies.
Let's take it back about, probably two or three years now. We had a conversation with one of this leading about the [indiscernible] standard and about Reg E and what we saw as the inability of Connecticut and the region to meet those standards, if something didn't happen. What ultimately came out of that is the Hydro-Québec project. And as you know, we've made significant progress on that, and This is probably the first time that we've been able to say, "We actually signed that thing," as opposed to, "Trust us, it's moving along well." It's hard to know exactly what's the future is going to be like. And sometimes we look at the future in a static environment and we don't think that it is dynamic. Three years ago, we wouldn't have talked about Hydro-Québec. Now it is becoming a reality and it is a business model, it's a participant pay model that may be the kind of model that allows us to deal with some of these larger renewable issues in the future.
This slide is simply something that we talked to you before we called it the consortium, it's really a group of four companies and NSTAR, United Illuminating, National Grid and ourself that are making progress on this project. It's not complete yet and there's still a lot of work to do, but it's untested [ph] conceptual stage. So as we look at the possibility of bringing onshore wind, typically in northern New Hampshire and in Maine, down into the low centers, this kind of project has a real possibility. 250 to 300 miles long, probably 1,600 megawatts, something around $1.5 billion in cost and a participant pay model that may allow us to bundle the generation and the transmission together and make that available to the load centers in the region. We'll talk to you more about this as it continues down the path. But this is a real project that we think we will be able to move forward, it's not in the five-year financial plans right now. But it is something, clearly, that we think this new company will be able to do in a way that's better than either one of our existing companies.
And then the last side is the Northern Pass, the Hydro-Québec project. We own 75%, NSTAR own 25%. It's closing obviously. So the new company is online percent. 1,200-megawatt of transfer capability. We have announced that Southern terminus, which is Franklin New Hampshire, the northern part obviously is a Concept [ph] station in Québec. We gave you an update on the cost of that project, it's about $1.1 billion now. The TSA was signed on October 4, permitting process started on the 14th with the U.S. application for the DOE, PPAs under discussion and will probably be filing the project with FERC, not probably, we are filing the project probably the month of November.
So that project is moving along. I know you've had a number of questions. This is moving along, and we will get there and in fact, citing we'd is a big milestone. We've still a lot of work to do. We've got to the approvals, we've got to build it. But it's moving along. the thing quite nicely and it's really is the kind of project I think that you can be duplicated elsewhere. It's going to be easier for a company the size of this new company to do this kind of project, I think, that it would have been an our stand-alone basis.
So with that, let me turn it over to Tom [ph].
Good morning, everyone. I'm losing my voice. A summer cold I guess, 90 degrees today. But bear with me, and I'll try to make it through. The Hydro-Québec project is something that Chuck thought up many, many years ago, and it kind of shows the potential. I call it might dowry. He gave 25%, and now he took it back. But here's a project that will reduce the cost of energy in the region, but yet will remove five times of the carbon of the infamous project. So it's really a project that most of the deal dramatically from a environmental perspective, but doesn't have an impact on our economy. In fact, it helps our economy. So it really is a good project.
And speaking about an exciting project, how about this merger? I'd like to tell my employees that I've always been interested in an industry that consolidates. Unfortunately, regulators don't always agree with us the way you should do it. But this is the perfect deal at the right time for both companies. As Chuck said, the whole world of environment and economy have come together, and it needs strong players, not to smaller players, but large and strong players to help local governments and even national governments to figure out an economic and an environmental policy that make sense for our region and the country. So bringing these two companies together is just such an exciting opportunity for us.
One of the things that, of course, all of our shareholders, Chuck and I spent the first three or four days running every one of our large shareholders just to get a reaction and tell them why we thought this was so exciting. And the reaction has been overwhelming, if you see the way our stock prices have traded for the first two weeks after the announcement. I think it's traded better than any deal that's been in our space for about the last five or 10 years. And we did work very, very hard to create something that was a merger of equals. In fact, I think I will be forever grateful that Chuck is entrusting his shareholders in my hands for some time after the close.
But for the NSTAR shareholders, we really do see an opportunity to use what we have built over the years which in my view [indiscernible] the balance sheet to instead of be a company that could financially accelerate its growth, be a company that could invest to accelerate its growth. So it's a perfect combination of using our balance sheet to get the kind of growth that will clearly outperform that industry. I think both companies have a great track record of the last few years of outperformance. I think this will ensure that we will outperform for some time to come. And that's important to me who has a lot of pride in what we've done for our shareholders.
Also, this large footprint. They're at one point in time where about six transmission projects, the Green Line that was going to come by sea, one is by sea, one is by land. We had all sorts of projects that we're trying to get this wind power in the north down into the low centers, and everyone of them wanted to land in Boston, where we have almost five million people. And so the combination of our load centers in our map and the Northeast Utilities expertise, you all have seen what they have been able to do with their Transmission business over the last few years, really puts us in a unique position to take advantage of it. As Chuck said, we're not exactly sure what's not going to the look like, but we do believe that when Lee comes up here and tells you about the Transmission business that there are things on top of that, that will evolve in the next few years.
One also of the most exciting things, and you'll see them in the slide in a minute, we really are balancing our risk. I really do believe we're creating a lower risk, higher growth opportunity for investors. We really are balancing our regulatory risks between Connecticut, the federal government, or FERC, and Massachusetts. And that balance should help us in the long run to really maintain a more consistent and constant earnings growth stream. So we're very excited about what this has in store for our shareholders.
And speaking of record of delivering on our promises to our shareholders, both companies have a proud history. We've been on a roll. And most importantly, I think that this is going to let us continue that track record which is, again, the goal is to outperform the industry.
The next slide of the show the balance in our regulated businesses. And I think I just love this slide because of the way it shows how we at NSTAR will be reducing the all-in-one. We've had a great industry in Massachusetts and we expect that to continue for some time. But to have this kind of balance, I think, does provide the kind of risk profile that will allow us to be very successful going forward.
We put together, Chuck and I, have worked diligently. I know many can't wait to get your hands on the proxy so you can see about our love story. He wasn't skating in Harvard or anything like that, but we did spend a lot of time together over the last four months. And one of the things that we really were concerned about is putting together the kind of team that would carry on this tradition, that would carry on those return numbers that we just showed a few minutes ago. So we have put a team together, a balanced team. We very excited about them. And you can see that we have three and three. Three from Northeast Utilities background, three from NSTAR background. And we look forward to working together to create the kind of company that every one of us is proud of.
The timeline, Chuck said I'm very optimistic in this. I've actually challenge my people to get it done in six months. But a lot of it depends on how the election goes tomorrow night as to how quickly we get this done. But there have been an incredible reaction to this transaction from our politicians, our regulators and all of you. It really has been well received, and it's going very well and people want to help us to get on with the game. They really want help us get through the process. There's a no one throwing road blocks. There's no one saying this is stupid. And so Chuck and his team spent a lot of time in Connecticut talking to the regulators. It's a one-state approval. Connecticut has said that they don't believe they have an enroll approval process so we have to go through Massachusetts Department of Public Utilities. Essentially, that's the critical past 10, and essentially that's the critical path to this. And in Massachusetts, we have a no net harms bender don't average to go through any time rate process [ph]. In fact, our company is operating under a race freeze until 2013. So there is no need to talk about rate with respect to this filing. There's a lot of history, a lot of presidents before going through and approving mergers, and so we're just looking for a window when the DPU is not to busy. And we expect, as you can see here, to file probably in November, half hearings in January and then it's up to them as to how quickly they issue an order. And hopefully, that will be on the quicker side.
There's lots of reasons why -- and we at NSTAR enjoyed a higher multiple industry because many of you have looked at us as an investment opportunity, as I mentioned earlier, that's low-risk, high growth. Period the combination. But there are a lot of characteristics that are responsible for a company having a premier valuation. And I think the slides has just about every single one of those factors that allow companies to be treated differently or special. We seem to have created a company that has every single one of them, whether it's that significant growth prospect that talk had mentioned, whether it's the strong earnings and dividend growth prospects, whether it's the diversification of income that we now have that seem so balanced, the management team we put together. I think you could our track records. We care about shareholder returns. That's what drive us. That's what we have delivered for many, many years. And we can do it all with wonderful cash flow, very, very strong cash flow. We do not need to dilute these earnings going forward.
I'm told that when something is said at this conference, it becomes public information and you can use it. So I'm going to borrow something. I don't know if Steve Fleishman is here. But I heard him yesterday tell his investors that this is a stock that you all should own. And I honestly believe, I believe it's the best total return opportunity in this industry.
I'm going to leave it at that and introduce the great, Lee Olivier, our Chief Operating Officer to tell you how he's going to help us to invest all these great cash flow.
Because of the merger, but also because of the many accomplishments we've had the course of this in terms of our major capital programs. And all of our projects environmental aspects. But I don't think there's a company that's more for the environment, if not the for the last three years between the essentially for the most part shut down all of the major goals of coal-fired power plants that used to how to do it because of the reliability needs, the obviously the building of the scrubber that's created most of the CO2, not the CO2, but the nitrogen oxide and other pollutants in the air and of course, our solar program in Western Massachusetts, as well as this project we talked about. Really it's a major environment to last about region. So they're good for shareholders, good for customers and good for the environment.
The plans has about $6.6 billion of capital spend. That's up about $200 million over las year's plan. I'll go through that in the two sides. Of note, about Transmission makes up about half of that capital spend and then you'll see that the transmission CapEx continues to stay strong as we go forward. And as Chuck indicated, there is really no capital in here for any of the transmission that would be built around the consulting project, which could be up the range of a couple of billion dollars. But as he said, that's a real project. That is moving forward. We'll have more information on that later this year.
When you look at Transmission, we had great success with new project for the reliability segment in that project but. That was a project to talk about $714 million. It's now pegged at $795 million. That is a very, very good price we received approval, both in Connecticut and in Massachusetts. And we'll start construction of the first major substation of the people project in the December time frame. We're going to finish up the environmental comedian and tutoring over the winter. Full-blown capital construction of that project next year. So we have about a couple of hundred million dollars of CapEx spend next year. That takes a lot of the uncertainty around that project. We are also in this update to the overall cost of the project, the number of changes there. The project in the Central Connecticut portion of the project shifted out about a year. We'll give you updates on that as well.
We're also happy with having rate certainty around the deployment of capital and that the company's and about a five-year settlement, rate case most of 2012 structured it a little bit more. But we have certainty around the capital deployment and the recovery of that capital.
When we look at generation, the Merrimack scrubber project is really on schedule. It's on the budget. if you Remember, we said that project cost about $547 million. We now reported forecasted about our project to be $430 million. It was still finish on time, in the middle of 2012 but really just again, solid progress there as well.
And recently, we completed about 1.8 megawatts of solar at Western Mass Electric. We kind of turned the switch on that last year another 4.2 megawatts of solar is part of a $41 million capital plan that we've got previously approved by the Massachusetts BPU. So solar in place by the end of 2011, beginning 2012.
Gas, another rate great growth story. Our projects what are great pipeline project what about a $67 million project is almost half complete. It's right on schedule. It's under budget. That's a project that's going to take about two years to connect a lot of customers. We're able to ask customers interruptible customers. And you see a host of other investment opportunities in and around business in a fairly significant way. And then they put it together, with the NSTAR driven thousand gas, you've got a guess customer base and that's about 500,000 customers, so real growth opportunity.
Today, covered most of the highlights, the siding decision that we did yet from both Massachusetts and Connecticut was on what exactly what they wanted. We had very few inconvenience in that project. You see great expectance in the local community and municipal official. [indiscernible] Now reforecasted that, that project to be about $430 million will still shareholders on time in the middle of 2012. But really, just again, solid progress there is well. And recently, we completed about 1.8 megawatts of solo at [indiscernible]. We kind of threw the switch on that last week, we're going start with about four-point team. Megawatts of solo is part of a $41 dollar factorial plan the we got previously approved by the Massachusetts BPU. employees [indiscernible] by the end of 2011, beginning of 2012. And you look at liquid gas another great love story. Our projects are wanted pipeline projects with about $67 million project is almost half complete. It's right on schedule, it's under budget. That's a project that's going to take about two years to connect a lot customers. Oil to gas conversion, interruptible deferring customers, and we see a host of other investment opportunities that grows our business and it's building significant way. And then when you put it together with NSTAR 400,000 gas customer, you've got a gas customer base with about 500,000 customers. So real growth opportunities.Very interveners in that project, you see a great acceptance in the local community and municipal official. Again, strike instruction in the December timeframe and the project will be complete in service in 2013.
Now in the appendix of the presentation is that slide that we always put in we'll update you on each of the three segments and again, the key milestones, so you can see exactly when those will take place. The Interstate Liability project also known, huge for that project earlier this year. We're going to have a meeting late this month we the New England Advisory Committee. We and our partners with the National Grid will present the overall Interstate Reliability project through the past committee and as National Grid has [indiscernible] that's over in Rhode Island and Massachusetts. And the result of that, we would expect shortly thereafter to see that go ahead from [ph], in which case, we will start deciding of the IRP project in the third quarter of 2011 for the project to be completed and in service by 2015.
So again, we're very, very positive with the escalated the possibility of project which you'll see in the next slide based upon just the fact that it's that shifted out essentially a year. And the Central Connecticut portion of the project is still under review by ISO, and is being reviewed again by prospects of a number of generators that could potentially retire. So those of you that follow New England, in particularly Connecticut, you know that many of the generators was was the exception of exception of the liquid generated. For the most part, don't run. Shut down of the forward capacity market pricing, and that continues to drop. That becomes an opportunity before. 2014 time frame before it goes away. We expect that there will be retirement and would expect also to evaluate those against the market and render a decision on the new date of the project. Now that's needed, it's just a matter of the timing of the date. We expect to get that by the end of the first quarter or beginning of the second quarter of next year.
This next slide is kind of a busy slide, but what we wanted to do for you is kind of do the math for you and reconcile the cost of these projects. And as you remember, we've had this $1.49 billion cost of for final construction cost estimate and the title planning around selling, general and administrative expenses R&T, we escalated at to $795 million. As a result of the other two projects shifting about a year and some other projects allocated to that we escalated those costs. And we arrived in this bucket of $200 million of other news-related cost. And what we've down here is the disposition both inside of the slide. So the new cost of news goes to $1.518 billion. However, United Illuminating, and Connecticut, but I'm essentially about an 8.4% ownership of the assets that are inside of Connecticut. And that would be up to about $69 million. So when you do the math, subtract that from the $1.518 billion, you cannot come up with a new project cost of $1.449 billion without of the cash flows us you see them right now on that particular slide. So finally that $84 million on the bottom of the slide, it's been $84 million of projects that are approved, underway and in many cases some of been have done. The remaining $200 million is embedded into the other segments of the project.
Now Chuck talked about the Northern Pass projects. And we are extremely confident in getting this project done in terms of the projects that we have made with the TSA being signed, with file that TSA by the end of this month. With FERC, we expect to have somewhere around late January, early February. We have filed with the DOE for the presidential permit, which is a permit that you need to cross over into Canada. That permit just two things. Environmental impact of building the lines and then answers that would align process opens into another country, doesn't cause any undue security from the energy standpoint is to building the line. Some other key milestones. We will begin all of our engineering, life long lead time, conversion station in 2011. And start construction of the project in 2013 for completion in late 2013. The person later that project, Jim Muntz is our President of transmission project director for $1.2 billion middle project is that in that effort. All of the roll out we'll have so far with business leaders, government leaders in the various communities has been very, very positive. So this has been well accepted inside of New Hampshire. So we will continue to give you updates on this.
If you look at the bottom of that slide, there's an asterisk around the cost of $1.1 billion. And that's really all part of the commitment that we have inside of the transmission services agreement to update the cost of the project within 45 days of signing of the TSA. So we will do that later this year. I'm not trying to signal that the project cost will go up or even change in any way. But if it does, obviously, enema to the way, we will advise you about the bid process. So solid year in terms of this project moving forward.
This next slide looks at our CapEx, and it's kind of the look at a cost that look forward, the spend about $2.8 billion, the spend going forward think it's about $2.8 billion. And again, as Chuck indicated, there really is no CapEx year for the consortium project. In terms of the CapEx here, that's going to be another additional $1 billion of CapEx to becoming in the very near future.
First of all, through the bucket moves by $1.5 billion there, we will spend about $230 million on news by the end of this year, with about $1.2 billion to go. The Northern Pass, the current NU share of that is $830 million in terms of what's we get into sighting and engineering. In the appendix, an update on the last bucket which is the $845 million. And also, a smaller project which is spread throughout the new state region and I think, projects as a reader system plan or they don't need to be inside the regional system plan. That's the confidence level of building that $845 million is very, very high. So that's kind of a look, the three-bucket look, very similar to what seems in the past.
When you look at the electric distribution generation spend, the distribution has increased $437 million over the previous five-year term period. And many of the reason why it's increased is because this three-year is $217 million of AMI Smart Grid inside of Connecticut I can call are in his seat those who are in the 2014, 2015 time frames, the total of the project is nearly about $300 million dollars, about $296 million is estimated to be right now. But also includes $130 million more as part of the rate cases that we have either settled or concluded that CL&P and PSNH. And included in there is up to a total spend of $50 million should reduce rate case Mass Electric.
You have in the past $30 million a year, we propose to spend about $50 million $20 million more is a result of aging of a chore and upgrades needed. Now in regards to AMI, and the additional CapEx spend in Western Mass, to the extent that we do not see rates or revenue rates are recovery father, we will not make those expenditures. We're not going to make those recovery. The DPUC, that Connecticut DPUC SOA started a docket on AMI. The hearings in November, December of this year, and they will render a decision sometime idea the first quarter of 2011. As you remember, we have arbitrated for a full rollout of AMI for all 1.2 million customers because it has is the least cost approach to rolling out. We've taken the approach to go longer in terms of a rollout false starts or other U.S. initiatives on private security and operating protocols so that's right just a little bit longer.
We look at generation. Generation is down by about $214 million that's really for the most part to do with Merrimack. Concluded about $152 million $160 million in the Merrimack Scrubber. We forecast and the price of that again for $4.57 to $4.30. Frankly, we look forward to those units and we probably won't have to spend as much capital as we previously thought. That's $217 million difference there.
Gas, for the reasons I indicated before, we see a good growth story there. This five-year look includes by $104 million over the previous five-year look for a total spend of $585 million. And it's really centers around the four areas. One is running the base of business, the other is just conversion from a lot of customers, about 50% of the in Connecticut, a lot of opportunities for natural gas prices in the commodity now when we think it is for the first in the future, the conversions from other guest and also from interruptibles over the firm. We have the large backlog of customers that want to be connected commercial industrial customers. And so we have a number of projects that would build out supply lines to those areas. And we also have this thing called, which is the distribution management program come which is a federally required program to basically take out the old steel piping. So a spend really about on that. Rate base, $714 million, up to $1.1 billion by the end of the five-year planning period so that's about a 53% increase in rate case, so we really do believe that this company is very successfully.
So just for the sake of time, I'm going to curtail [ph] my presentation and turn it over to David McHale, who will take you through the financials.
Thank you, Lee, and good morning. I'm to go to speak for just a few moments on business as usual. But business as usual is pretty good these days. We've got third quarter earnings that were released on five, quarter were up 55%. Based on some of the structural trends that we're seeing for the year, we've also increased guidance. Remember, we started this year with a view of midpoint around $1.90 a share, midpoint [indiscernible] new guidance of $2.15. I'm going to talk a little bit of how that work it's way into 2011 as well.
The cash flow story has always been important for us as a company. It really speaks the finance ability of our rate case plan because of bonus appreciation and a number of really key drivers this year, we're ahead of schedule. We accretively told you that we expect that FFO to climb by about $100 million a year. Couple of years from now, we'll be at over $1 billion of FFO compared to maybe two years ago when we were half that. Very, very strong asset of our overall plan.
In the cornerstone of our stand-alone plan, is that rate case grow that we've gone through, marrying that with the NSTAR plan is going to a think-a-draft [ph] discompelling total return story to just this compared to a link to return story that Chuck and Tom referred to earlier this morning. And I'm just going to summarize that for you. I won't go through all those details. But first with the quarter, because there's a couple of things that we want to point out that you see the numbers here and you're right, $105.5 million for earnings, driven surprisingly by the Distribution business. The Transition business, right on course, actually little bit ahead of schedule, September is about $2.6 billion, that's up about $140 million over last year. And once we get into this greater Springfield project, that'll drive 2011. But in terms of what's really happening behind the scenes, and it's to be expected that distribution business is [indiscernible] coming off, that is Joe business is now specifically coming off the TSA may those things earnings been driven. And of course, there's a weather effect here. But the to look at what's happening this year, its work to our views for both guidance and next year, really good progress around O&M management, our uncollectible expense going [ph] around our relative expectation, whether it's about $10 million of earnings in this quarter and also the rate cases. If there's a soft spot and you've seen this, it's around sales. When we reported second quarter and we talked to you in August, we were seeing a little bit of optimism in terms of year-over-year growth. I think April was a good month. May was a good month. June was a little bit a low month, but we've seen some summer in July and August. Now the real sales, of course, are really up 6.5%. But for the quarter, weather-normalized sales was at about 4.5%is to inform recent commercial and industrial. Now the good news is when we look at look at September alone, figure were the commercial sector. We see in Connecticut strong export driven, growth. We see an increase in average work week, but no question that were not getting the real growth that need that maybe we saw or maybe out some progress in the summer. We've did see employment soften and all that in Connecticut. So this is something that we'll look at. You know from our conversations the past and that some of our states like Connecticut and New Hampshire, 2/3 of our revenue, our revenue our distribution revenues is tied to the sixth component of rate structure. So while we don't call outright this top lands, we're collecing a lot of revenues through and the land customers charges. So our balance business model is not as sensitive as a unit sales growth and certainly even for so for 2011, we're not dependent on our recovery on the economy. It certainly helps but it's the overall vest to program, I think weather some of what we're seeing there.
When you look at the individual components, I will spend a great deal of time on this is a little bit different than our sales equation. They are as Lee suggested, seeing weather-normalized sales growth of about 6%. They had a very mild winter, so their real sales this year is off about 20%. But the real driver is here aren't at the rate cases that we're seeing in Connecticut and in New Hampshire in O&M. Now O&M in particular is driven by real productivity benefits that we're seeing, I don't think these are sort one-off occurrencies. I think you're going to see this as one of the rationales of why we're optimistic about 2010 and 2011.
Uncollectible expense has been a great store within the story and for the uncollectible expense in the company, that is not track to our rate last year. It cost our company's $47 million hit bottom line. When we started this year, without they see an improvement. We have built into our plan about $35 million. Right now, we are trending more like $25 million. So good story there, and now will fall to the bottom line. And I think that also translates into 2011. For PSNH, it's that plus, it's good, HPPC growth coming up of the Merrimack project.
You've already seen this slide but I'm sure, a couple of things I really want to clarify here, I'm sure our complicated by showing you both GAAP and non-GAAP segmented. What's important is the asterisk. We are saying that our guidance this year can be $2.10 to $2.20 per share, that's both GAAP and non-GAAP. And what's happening behind the scenes here is that we have in this quarter, it's not reflected yet in our financial results, that level pass as a nonrecurring gain. You're good to see that in the quarter, $16 million, $0.09 a share. It's not going to happen next day. It's not going to happen in the future. We call that man recorded. The also begin as well as our partners to the transaction cost associated with the mother the quarter as well. Those are equal roughly and upsetting, $0.09 gain, $0.07 cost. And so that's why both on our GAAP and non-GAAP basis for me to get back to that $2.10 to $2.20. But when you think about the earnings capability of this company from what we are about those top line. One of the $1.20 for distribution and $1 for the transmission business. Those are little bit ahead of plan. Again why? This is our second time we got it higher. And some whether but it's the O&M. it's the uncollectibles comments a tax benefit that we would see that was on another company's overall effective tax rate.
Now what I don't have any of that we showed you last year's forward guidance. We have stopped short of selling it 2011 guidance, not because we are not content around 2011 but we are partnering with NSTAR, they would typically put out guidance with a complete the year and at the turn of the year their view of 2011, we're going to the the same. That said, we know where our consensus as comments roughly $2.20 for 2011, maybe $2.21 depending on how you account that out. We think that's conservative, in part because what I'm telling around is the structural trends that we see a O&M. We're not going to carry weather for web per share the way we're managing our business, including as Chuck addressed the projects that are now in place, so we think having our earnings for 2011, the rate was already sad very, very well. Greater Springfield is mid-2011 over $300 million rate base alone. The Merrimack Scrubber project, that is driving earnings go into 2011 for the full year of a case, a full year at PSNH rate case, As you know, we're in the middle of a Massachusetts rate case, so all those photos are priced well. Now on the margin there are things that we are starting pretty hard, sales, pension expense and the like. Consensus out there is good but I think it is conservative. When we report for the full year, we'll give you sort of line by line segment guidance for the take away is it's been a strong year for us, 2011 is going to be another very, very attractive you overall.
Now on the CapEx, I won't go through all, but just to summarize what Lee has position there. And we've got a little bit of a callout table by segment on the right $6.64 billion. These bars that you see were the year-by-year spending in 2011 through 2015, we have sort of two callers for you here, last year's plan model fine-tuned pretty well. And then just to summarize the overall program, the cornerstone of the stand-alone plan is this rate base of growth. It adds to another 9.2% overall CAGR. The underlying transmission growth is a double-digit CAGR 10.7%.
Because of the merger, were going to stop should've say what the stand-alone growth is. You know from our discussion and from Tom, highest end of 6% to 9%. Stop short talking about what our stand-alone dividend policy is, it was 50%, now our dividend policy going forward is to drive dividend growth consistent with earnings take. We're going to talk about the overall finance ability. More definition of what we're doing 2011. This program was delayed some debt financing, not a problem, we have great access to capital. Regulator are supportive of that, much of the overall approvals, state-by-state are in place. The one thing that of course is different, there's no equity required to get this plan done. That certainly is beneficial for the numbers overall. And it's all third-party transportation profile going forward.
Now I'm going to pause there, and give my partner Jim Judge an opportunity to run through a few slides covering their quarter.
Thank you, David. Good morning of folks. I'm going to finish up I guess with the last seven or eight slides. The three takeaways is that like you to walk away from my comments on these. First of all, and star track record this is actually utilities my guess is a lot of your more familiar with the NU store. This is an opportunity to give you some perspective on who the new partner is. The second take away is that we just finished yet another very strong quarter, estimates for the quarter now provide a little bit of color on these results.
The third message is really to tell you how very excited item about this strategic combination. And this is really a transaction that makes so much sense in many front. And what we have here is the best-in-class distribution operator coming together with the best-in-class distribution operator. was having is that -- which you tell it a coming together with a project-rich utility. What we have your way to top management teams coming together to may could even stronger one. And I often say that the best indication of what a management team is going to do to you in the futures take a look of their track record of the past. These are two companies that have outstanding record in terms of delivering results to shareholders.
Just when you thought you had seen enough Safe Harbor language, here's one more slide, my making some forward-looking statements and you should and can review any further disclosures in our reports to the SEC.
So those of you NSTAR, business philosophy that is very simple. We've alluded that if you give an excellent customer service, new customers will be happy, customers are happy that letters are happy and in the regulators are happy, financial success usually follows. So follow for several years, expanding on that customer service and reliability, is really a half-dozen key metrics that gauge the performance of a distribution utility: the number of outages, the length of outages, the call center performance, billing accuracy and timeliness, every single one of those measures is in the top quartile. Many of them in the top percent of the industry. So we have some excellent customer service, excellent customer service track record. In terms of customer satisfaction of the highest in the region. And an improved for four straight years. I'm very confident that would result philosophy the most companies will be able to do more.
From a regulatory standpoint, NSTAR has a very, very long street of rates elements, working effectively with our regulators and long-term settlement for the shareholders as well as the customers. In fact, we look at this as a core competency of our management team. We haven't had a litigated rate increase since 1986. That's 25 years. I see no reason why we can't continue this. Actually, that span of 25 years, it involved the six governors, five attorney generals, more than 20 CPC commissioners. So obviously, we've been able to sort of exercise of these goods in a number of different regulatory climates. Tom and I have been involved in every one of these negotiations and I'd speak for both of us have never been more confident about our ability to do yet another settlement in the back end of this rate deal that expires by the end of 2012.
Key element of the NSTAR earnings growth story has been our ability to improve productivity and control costs. You can see that spending in 2009 went down. That was all discretionary nature. These cuts are really customer service and reliability. One Wall Street analyst, who I think is actually here, wrote in the past that NSTAR's O&M discipline is as unmatched by any utility I can think the numbers support that.
Over the last many years, we have earnings growth is outperforming. In our second quarter report, we did upper end of our guidance range to $2.50. Like David mentioned, we exclude from this onetime items this year that you should note. We earned $1.03 in the sale of business in the second quarter. We just announced a settlement in the IRS covered seven years and if the quarter. And we will have some tax-related expenses in the fourth quarter.
As a result of solid earnings per share performance, we've been able to increase the dividend 7% last November the 12th year in a row in dividend our payout ratio continues to be conservative in the low 60s. And we feel very confident as David mentioned, we have the cost structure on a combined basis higher, earnings per share growth and will fuel or higher dividend growth in expected of growth to continue to track earnings going forward.
We are particularly proud of the job shareholders, as this graph shows our total shareholder return, has increased over the past 13 years. $1,000 invested in NSTAR is over $5,000 today. Actually updated for 2010 we've provide shareholders another 18% already this year, so I'm pretty confident we'll be 14 years now and counting. To that put us performance into perspective, utility and the country that has more than three consecutive years of positive total shareholder returns.
Also to put into perspective, we've done a little bit of research, you will find any company in an industry, manufacturing, high-tech, retail, banking that can match that track record of consistent total shareholder return increases year in, year out.
So our financial performance has been up the charts investments concerned with is the financial condition of their investment. And the slide you know about NSTAR financial condition is number one in the industry with the highest credit rating to so very long record of providing great returns but also clearly, a very strong commitment to maintaining excellent credit quality. I think both of those values will continue within the new company.
An update on transmission. Obviously, Mass Utility is supposed to child a transmission development but I do want point out that NSTAR has doubled in its transmission rate case in the past five years. And we have projects in the queue that will allow us to double it again in the next five years. We have basically based on reliability and capability projects number of year. That's about $100 million a year on average. We are currently licensing a new 345-K new line over the canal, keep in. That's $120 million investment currently before the Energy Facilities Siting Board in Massachusetts. We expect spending will 2011 and '12. We expect that to be in service by year end '12.
We have a Boston said that reliability project, the 345-K. behavioral into the timeframe 2013 expected's construction. Also have. behavioral that we're stalling done in the Mid-Cape that basically will extend the benefit of the land that we have going over the canal. The bottom bullet there Northern Pass Chuck has covered the; Hydro-Québec project and a number of folks have talked about the potential of accessing that northern New England, the Consortium project.
Released earnings after the market closed Friday. Benefited from an 8% growth in sales that reflected the hot weather in the Boston area. In addition to the sales increase from the weather, we did pick up $0.02 from our annual PVR inflation adjustment created story rate settlement. The lower interest costs compared to a year ago. They gave us $0.03 and it gave just execute a share of the purchase of when you compare with last year's number, basically provided a $0.03 in earnings. Items are things that are in line with our guidance, increased O&M, increased property taxes associated with our capital spending or rate-based growth. Lastly, what it services business so in this quarter, the absence of earnings associated with that sell which is $0.02.
I do want to take a minute to talk about income tax settlement that you see in the footnotes. It's a positive development. It resolved all outstanding tax issues that we have firm 2001 to 2007. What those free up is a tax refund of $135 million we expect to see by the end of the year.
That's really from my view. I'd now like to turn it back to Tom and Chuck for our closing messages and then obviously, questions will follow.
Well, I hope we've convinced you that we've got attractive opportunity going forward with continued very high return profile, we're all of the new NU team excited about a feature. We are excited about the opportunities that lay before us, and we're all available, everyone you've heard is available to answer your questions you might have.
This release is a very exciting a great transaction, and we hope you so some of that today across the whole management team. And as we the kind of work that the next three or four days, have the opportunity to talk us collectively and individually and I think we'll just see that was a tremendous company this is new organization is going to be.
So thank you again for your attendance, I know it's a loaded early this morning. We wanted to cover a lot of material, so we ask it to do that. Now, I'll turn it over to Jeff.
We'll have questions from the audience and will be around after work. So there could start, going to review the question so that people on the webcast know what they are and maybe Jim and David and Lee can join me up here.
The question is concerning future investments in generation, particularly renewable energy.
That category, that potentially leads to the future. Clearly, the Consortium project that we talk about will tie in both by others and transition with built by as so I think help resolve some of the standards going forward. Who those come what the future might bring, I think Lee talked a lot about some of the solar projects our involvement in Massachusetts. I think his new company's gross ability to do the work together in a way that we haven't to resolve some of the energy solutions for the region that are going to be fair amount going forward.
The question is concerning Connecticut and jurisdiction over the merger.
From the legal issues both Massachusetts, it is a holding company, the holding company transaction in only Massachusetts really needs to approve this transaction. Having said that, we've met with the governor and with to PUC of Connecticut and in have conversations with the governor in the BBC Chairman New Hampshire. They are going to want to stay very actively involved in this and make sure that negotiations are fully represented by the PUC. I think it's fairly appropriate so we're working with them and make sure they have all the information around this, particularly as they look forward assume.
The question is the impact of the capital program on overall retail rates over the next five years.
Distribution is just because the price of natural gas, the commodities right now, the energy pushing, the bill has been falling, as an example sale lumpy rates will probably fall in January, between 60% to 70%. If you look at the five you going forward plan for CL&P over the course of the next five years, that adds up to about $11.57 increase to our customers billed on a monthly basis, based on 700-kilowatt customer. But each of the companies obviously different because of the different structure and how they procure energy. So it's about 2% fee over the course of that time, slightly more for the other two electric companies and just natural gas on the commodity on the Yankee side, CapEx spending is his own about a 10% increase over that five-year period.
And I think what we've been saying on the generation fees will go to significantly currently about $0.11 an average, it's probably goes to the mid $0.09 somewhere. That's the impact of the general generation fees. And the question is relative to consensus of about $2.20 a share. What are some of the assumptions in terms of ROEs and so forth?
When you look at the and just think about where they're going to have this year, PSNH for all these business with the exclusion of transmission, will be in the 9.5% to 10% range, which is a good run for them and I see that for the driving forward into 2011. CL&P, its new rates are going to work its way in to be the 7% to 7.5% of your and '10 and work away into '11 and statement in August, this is a company that should be achieving 9% a bit better, we've got some work to do there. But relative to the and we've been earning, this is big year-over-year on a run rate basis.
The question is going forward, what would the merged company look to in terms of credit rating?
We have thought all along that this is going to be credit positive for the chance to. Certainly, that's going to help the hold. co. potentially the operating companies and translate into lower. That's quite positive. I think you're going to see us make an argument that for and star, the ratings that they have are now are attainable in terms of lower the risk profile overall. We've seen some actions that have taken place. We're going to spend a lot of time said that and have that discussion about what impacts is on NSTAR going forward even without existing ratings profile the maintain that; I allowed him to add any other color to that but we're going to have that assumption.
Personally, I guess what I would say is we've anticipated all three agencies to put us on credit that is happen. So it's a mixed response. Spending a lot of time with them. Qualities fundamentals and star entities remain intact. Tom talked about the fact that diversity that we have now are not only the Massachusetts, risk factor but being able consideration is the the the assessment. Pretty optimistic about bullish outcome of the expectation is utility credit uptick out of that for sure.
We want to thank you for joining us. We're going to stay around for a while, if you have further questions. We shareholder visitation later in the conference, and we'll probably be seeing many of you. So thank you very much, for joining us today, and enjoy the rest of the conference.
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