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

NSTAR (NYSE:NST)

Q2 2011 Earnings Call

July 29, 2011 9:00 am ET

Executives

John Moreira – Director, Investor Relations and Financial Reporting

James J. Judge – Senior Vice President and Chief Financial Officer

Analysts

Andrew Levi – Caris & Company

Greg Gordon – ISI Group

Mark Barnett – Morningstar Inc.

Michael Lapides – Goldman Sachs

Paul Patterson – Glenrock Associates

Jonathan Arnold – Deutsche Bank

David Paz – Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 NSTAR Earnings Conference Call. My name is Jeff and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. John Moreira. Please proceed, Mr. Moreira.

John Moreira

Thank you, Jeff, and good morning, everyone. I'd like to welcome you to NSTAR's conference call to discuss our reported earnings for the second quarter of 2011. With me today are Jim Judge, NSTAR’s Chief Financial Officer and Phil Lembo, Vice President and Treasurer.

Before we get started with Jim's formal remarks, let me remind you that some of the information discussed during this phone conference will contain forward-looking information within the meaning of Federal Securities Laws. The forward-looking statements may contain statements about the benefits of the merger, transactions, whether and when the transaction will be consummated, the combined company's plans and other statements that are not historical fact.

You are cautioned that such forward-looking statements with respect to the business of NSTAR and the pending merger are based on current expectations that involve risks, assumptions and uncertainties that are difficult to predict or control. These forward-looking statements are not guarantees and management cautions that a number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements.

NSTAR specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise. I refer you to the cautionary language regarding forward-looking statements and other matters included with our merger related filings. I also refer you to the risk factors disclosed that NSTAR and Northeast Utilities included in their proxy statement filed with the Securities and Exchange Commission on January 5, 2011.

NSTAR has filed materials related to the proposed merger with the SEC including its proxy statement. You are urged to read those materials. These additional materials can be obtained free of charge from the SEC’s website at www.sec.gov or from NSTAR’s website at www.nstar.com.

Now, I'll turn the call over to Jim Judge. NSTAR’s CFO.

James J. Judge

Thanks John and let me also welcome everyone to today’s call. Yesterday we reported second quarter results for 2011 of $0.59 per share versus $1.61 for the same period in 2010. The reported results for the current quarter include $1.1 million or $0.01 per share for cost associated with the pending merger with Northeast Utilities. While last year’s second quarter included a one-time gain of a $1.03 per share related to the sale of our district energy business in June 2010.

So earnings for the second quarter of this year excluding the merger costs amounted to $0.60 per share as compared to $0.58 for the same period last year excluding the one-time gain. That’s an earnings increase of $0.02 or about 3%. These results are in line with our earnings guidance and Wall Street’s expectations.

The primary positive drivers for the $0.02 increase includes several items that each one contribute about $0.01 to earnings results for the quarter. These include the positive impacts of first higher transmission revenues, second, an increase in gas distribution revenues reflecting a sales increase of 15% this quarter resulting from a 34% increase in heating degree days.

Third, energy efficiency revenues reflecting our incremental spending in this area as prescribed by the 2008 Green Communities Act. Fourth, the lower level of common shares outstanding have resulted from last year’s share repurchase program. Fifth, higher revenues from our telecommunications operations and lastly the impact of our 2010 order from the Department of Public Utilities which reduced transition revenues last year by $0.03 is absent in the current period.

Positive impact of these items was offset somewhat by first an increase in depreciation and property taxes which lowered earnings by $0.02 reflecting the continued investment in our electric and gas system infrastructure. Second a 1.8% decrease in electric sales which reduced earnings for the quarter by $0.02 reflecting weather conditions that saw cooling degree days that were 26% lower than last year, but still above normal.

Third, an increasing operations and maintenance costs which reduced earnings by $0.01 and reflects an increase in storm and labor costs. The closing of the reconciliation for the quarter is the absence of earnings in the district energy operation last June which reduced earnings for the quarter by $0.01. Economic conditions here in Massachusetts continue to improve and remain better than the economic conditions at the national level just last week Massachusetts reported that it added more than 10,000 jobs in June and 41,000 jobs since the end of 2010.

They are also reported in unemployment rate of 7.6% for June which compares very favorably to the national rate of 9.2%. Since June of last year employment levels here in Massachusetts have increased at a rate of 1.6% compared to an increase in employment of 0.8% on a national level.

I should note that our system liability and customer response levels through the first half of this year continue to be very strong and our customers are pleased with our performance as indicated in a recent residential customer survey conducted by J.D. Power & Associates in which our ranking with in our peer group moved up again.

We are now the highest ranking major utility on the East Coast from Boston to Washington DC in terms of customer satisfaction. Just last week our electric system performed very well during a four day heat wave as temperatures in Boston in a 103 degrees last Friday and resulted in a new all time peak demand for NSTAR as well as an all our new all time peak for ISO New England.

Now I will comment on a topic I am sure you are all interested in our pending merger with Northeast Utilities, we continue to make progress with the merger on July 6 with Federal Energy Regulatory Commission approved the merger on the terms requested by NSTAR and NU in the application that we made in early January.

In Connecticut on June 1 Department of Public Utility Control issued a final decision regarding the merger concluding that it do not had jurisdiction which is consistent with its early address decision issued back in November.

Subsequently on June 30 the states office of consumer council and other parties filed an appeal in Connecticut Superior Court essentially looking for the DPUC to reopen proceedings to review the merger transaction and reverse its decision. We are confident that the Connecticut Superior Court will come to the same conclusion as the DPUC.

In Massachusetts evidentiary hearings before the Massachusetts Department of Public Utilities began on July 6 and concluded yesterday. The Department has now established a procedural schedule of the parties this is a typical schedule with intervene of (Inaudible) in three weeks company briefs do by September 1 and then two weeks we applied briefs ending September 19. We expect the Department’s order to come with in a reasonable time after that and the only other approval we are awaiting is that of the Nuclear Regulatory Commission.

From my perspective there were no surprises at the hearings of the DPU, that went as expected the Attorney General’s office focused on customer benefits from the merger, other intervenors focused on the environmental benefits and the DPU staff (Inaudible) and follow up questions in all areas.

We have provided very strong evidence in support of the merger, it’s important to emphasize that in the testimony with the Department and the nearly 1000 information requests that we completed we have clearly demonstrated that the merger will provide substantial benefits for customers from both the financial and environmental perspective it certainly meets the Department’s new net benefits standard of review.

As some of you may know during the course of the hearings the Massachusetts Department of Energy Resources filed a motion to stay the merger proceeding with DPU. The motion seeks to delay the proceeding to look further at climate change impacts of the merger and analyze current and future rate levels. In our view the filing is very unreasonable and unprecedented requests in the response that we filed last week we indicated that the DPU should dismiss the DOER’s motion for a number of reasons including that it would certainly be detrimental to customers.

It would deny or certainly delay customer benefits expected to be derived from the significant cost reductions projected to result from the merger as detailed in the supplemental testimony and net benefits analysis that we filed in April. In our net benefits analysis we indicated that customers in all jurisdictions would benefit from net savings of $784 million in the first 10 years. The Massachusetts DPU has not yet ruled on the DOER motion.

This merger is truly a compelling story for customers the economy and the environment one that allows us to remain very confident that the merger will close later this year. Next I would like to update you on NSTAR’s 31 mile, 345 KV transmission line that will cross the Cape Cod Canal and help to improve reliability for our customers on Cape Cod. Line and station engineering work is expected to be completed in August, the evidentiary hearings conducted by the Energy Facilities Siting Board will complete at July 1st. Initial briefs will be filed today and replied briefs ado in mid August. A decision is expected from the Siting Board at the end of this year or early next year.

The estimated cost of the project remains in the $110 million to $120 million range. Our line is expected to be in service by the end of 2012. That concludes my formal remarks. Now I'd be happy to take any questions you may have.

Question-and-Answer Session

Thank you. (Operator Instructions) Our first question comes from the line of Andrew Levi with Caris & Company. Please proceed.

Andrew Levi – Caris & Company

Hey, guys. Long time.

James J. Judge

Hi, Andy.

Andrew Levi – Caris & Company

Hi, how are you doing?

James J. Judge

Thanks.

Andrew Levi – Caris & Company

Just wanted to ask question about the merger. I guess it’s the Patrick administration has made since Dave mentioned; you kind of alluded to it. Where you think they are exactly looking for? Any idea, is it a formal rate review longer-term or is a way you can work out a deal with them, to kind of expedite things and get this thing back on course?

James J. Judge

I don’t know what that will enforce me Andy, from my perspective, we're right on schedule. This procedural schedule that follows the normal routine that was laid out yesterday would anticipate a DPU decision on the case sometime in mid-to-late October. So that is what we are anticipating. I can't comment on Patrick administration’s interest.

Andrew Levi – Caris & Company

Okay. And then can the Governor in the sense slow the process or is the commission independent of the Governor?

James J. Judge

Well, the energy, the Department of Energy Resources is an energy policy arm of the Governor, but the Department of Public Utilities is an independent jurisdiction that would base the decision on the merits of the case, I think the Governor like everybody else likes the aspects of the significant customer benefits that this merger brings. I think it certainly attractive to consider the prospects of a Fortune 250 company remaining in the region with a dual headquarters, one in Boston, union contracts have been honored, I mean there’s a lot of merits in addition to the cost savings and efficiencies that this project brings that I think the administration would support.

Andrew Levi – Caris & Company

Yeah. I would agree with you. I was kind of little surprised by kind of everything it’s gone on. Okay. Well, well, I appreciate hope everything works out in an expeditious manner for you.

James J. Judge

Thanks Andy.

Operator

Our next question comes from the line of Greg Gordon with ISI Group. Please proceed.

Greg Gordon – ISI Group

Thanks, good morning. I'm not really looking forward to Albert Haynesworth facing Mark Sanchez twice a year, but --

James J. Judge

Well how about Ochocinco running downfield with green and white jerseys chasing him, Greg?

Greg Gordon – ISI Group

I’m not worried about that too much. But anyway, in terms of how the commission the time horizon for getting final resolution of this DOER issued, I mean they except the schedule for sort of the final phase of the merger approval hearings. So it is possible that they just don’t rule one way or the other on this motion and just give you a final approval or do they have to actually rule on it and if so what’s the time line?

James J. Judge

Yeah. They haven’t issued any guidance around timing, I think one possibility could be that it’s dealt within in the final order and obviously another possibility would be that it was decided on prior event. So there is no schedule that I’m aware of in terms of timing.

Greg Gordon – ISI Group

Okay. So we just have to look out for either a response specific to the DOER filing or they could just wait and rule on the merits of the merger in its totality and in the context of that comment on the DOER’s motion?

James J. Judge

Yeah. Those would appear to be the two likely options, right.

Greg Gordon – ISI Group

Okay, thank you.

James J. Judge

Welcome.

Operator

Our next question comes from the line of Mark Barnett with Morningstar. Please proceed.

Mark Barnett – Morningstar Inc.

Hey, good morning guys.

James J. Judge

Hi, Mark.

Mark Barnett – Morningstar Inc.

Just a couple of quick questions. With that office of the consumer council that finally. Is there a timeline yet for that fuel process, and I mean I know that fairly to Connecticut PUC doesn’t have any kind of timelines that they haven't decided to take any actions. But…

James J. Judge

Not that I’m aware of Mark.

Mark Barnett – Morningstar Inc.

Okay. So it’s just something that you will have to wait and see as the fuel starts, the fuel goes through or you going to – you’ll be proceeding as normally. I expect.

James J. Judge

The DPU decision of final order in this. And so we will proceed as normal and that the courts will decide the merits of the OCC appeal and take action accordingly.

Mark Barnett – Morningstar Inc.

Okay. And then with the Northern Pass process, are you progressing or how are you progressing I should say with the New Hampshire segment, I guess that was the remaining sort of right away from last quarter. Can you talk about your progress there?

Philip Lembo

Mark, in the past, I really preferred to defer any updates on Northern Pass to the Northeast Utilities team, I think Chuck, Lee and David have their earnings call in a few days, the project was their concept, I think it’s an ingenious one but they are the majority partner in the JV and that such a really leading all efforts in and more importantly they can certainly provide you with the much better update in the project than I could – and I understand their earnings call is just a few days away.

Mark Barnett – Morningstar Inc.

Okay that’s fair. One last quick question if I may obviously merger related costs are much slower in this quarter. Do you see that kind of the run rate for the next two quarters or?

Philip Lembo

I think it’s a good proxy.

Mark Barnett – Morningstar Inc.

Okay. Thanks a lot.

Operator

Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed.

Michael Lapides – Goldman Sachs

Hey guys there has just been more activity in New England about potential either retirement of scale back of one or two coal units and given some of the environmental rules potentially even some issues with some of the petroleum oil units. Just curious in and around the Greater Boston area what are you guys thinking about potential transmission needs over the next four to five years given some of the environmental rules in delisting better occurring?

Philip Lembo

Yeah, I guess Mike we in terms of that there is a process at the ISO with its regional systems plan developed, and there is process for doing filings and getting reviews there. So any kind of plans would have to be developed and run through the ISO approval process. So at this stage you know in terms of what the backlog is it doesn’t in my from what our knowledge is it is not a big backlog that is being generated because of these retiring initiatives but certainly the reliability is something that we focus on, we do the filings it run through the ISO process.

Michael Lapides – Goldman Sachs

Okay. And just kind of thinking long-term do you feel transmission opportunities as a sizable growth area for you in terms of transmission outside of Northern Pass?

Philip Lembo

We do, we have disclosed a $9 billion forecast, capital forecast between Northeast Utilities and NSTAR and a significant chunk of that capital plan is in the transmission space beyond the $1.1 billion anticipated for the Northern Pass project

Michael Lapides – Goldman Sachs

Got it. Thanks guys I will follow up offline.

Operator

Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed.

Paul Patterson – Glenrock Associates

Hi, how are you doing?

Philip Lembo

Hi, Paul.

Paul Patterson – Glenrock Associates

Just back to this M&A thing one doesn’t think of either U or NU’s having a large amount of environmental exposure because you’re mostly distribution companies. Give some specific issue that they are looking for in terms of the environmental angle that we should be thinking about?

Unidentified Company Representative

No I think Paul we made it very clear in the record that in fact these two companies own zero emissions producing generation in Massachusetts. And is part of merger filing we had actually proposed to increase the energy efficiency commitments that both companies have currently we have proposed to increase solar development commitments that currently exist for both companies and we have offered electric vehicle pilot I think that the merger actually facilitates the Northern Pass transmission project it is certainly more straight forward to manage a project with one owner rather than two.

So the environmental benefits of that project are overwhelming estimates of that project in terms of the impact to the environment are in the order of 800,000 vehicles you have taken of the road daily. So there is enough a lot of environmental benefits that they are advanced by the merger was made a record of that I would say in general that environmental advocates tend to look for more whenever they can. So I think that’s probably the motivation but I think we have made a very clear record that supports that we meet that benefit standard including the enhancement of the environment as a result of the merger.

Paul Patterson – Glenrock Associates

Okay great and then the forward capacity market there have been some activity at FERC with respect to buyer side market mitigation efforts and what have you and they did have an order in April which I guess basically sort of through something is back to the stakeholder process. And I guess when I was wondering any thoughts as to how you think this process might go. I know it is kind of may be early in the process but any sense as to what we might be seeing in the forward capacity markets, I know you guys are pretty heavily involved in the stakeholder process.

Unidentified Company Representative

We are involved, but I can’t speculate as to what the outcome could be Paul.

Paul Patterson – Glenrock Associates

Okay any idea of the timing we might see or…

Unidentified Company Representative

No.

Paul Patterson – Glenrock Associates

Okay. Thanks a lot.

Operator

Our next question comes from the line of Jonathan Arnold with Deutsche Bank. Please proceed.

Jonathan Arnold – Deutsche Bank

Hey, good morning guys.

Unidentified Company Representative

Hi, Jonathan.

Jonathan Arnold – Deutsche Bank

Could I just ask on the merger where you are in your integration for having process. When we should anticipate you will make sort of announcements about the next level of management et cetera?

James J. Judge

Sure I would say that we are right on schedule, we have had an integration process going on since shortly after the announcement, the priorities are to certainly to make to be prepared for legal day one there is about 130 initiatives that we've identified, 11 different functional teams represented by both companies, that have been working on positioning us well for day one.

In addition to that, those teams have been looking at an assessment of the – as is if you well at both companies for each of those functions, all of that work continues, the schedule would suggest that we would be ready for legal day one with the Department to issue an order in October as we hope. And in terms of management announcements, the next level would certainly be prior to that maybe as much as a month prior to our legal day one date.

Mark Barnett – Morningstar Inc.

Which could be as soon as October. Is that right?

James J. Judge

Yeah. That’s correct.

Mark Barnett – Morningstar Inc.

Yeah. Okay and then, thank you Jim. And then on last quarter you said you’ve had your – specifically put your guidance for the year in the press release have reiterated, we didn’t hear you mentioned it on the call in the release it is not. we still have 260 to 275 for this year.

James J. Judge

We are.

Mark Barnett – Morningstar Inc.

Okay. I was guessing so I just wanted to check. Thank you.

Operator

And our next question comes from the line of David Paz with Bank of America Merrill Lynch. Please proceed. Mr. Paz, your line is open.

David Paz – Bank of America Merrill Lynch

Good morning. Can you hear me?

James J. Judge

Yep.

David Paz – Bank of America Merrill Lynch

Great. Just I saw a question on assuming the mergers approved. Do you think – can you tell us when you would expect to file your rate case NSTAR Electric?

James J. Judge

Yeah. Certainly our seven-year rate agreement at NSTAR Electric is at the end of 2012. So as we always expected, that means that we intend to file a rate case in the spring of next year for rates to be effective January 1, 2013.

David Paz – Bank of America Merrill Lynch

Okay. Do you have to note that you’re in 2010 distribution rate base was the electric distribution?

James J. Judge

2.5 billion.

David Paz – Bank of America Merrill Lynch

2.5 billion and remind me, does that include goodwill or do we guys have a 500 million or so in goodwill at NSTAR Electric?

James J. Judge

No not a rebase.

David Paz – Bank of America Merrill Lynch

It excludes. Okay.

James J. Judge

Yes.

David Paz – Bank of America Merrill Lynch

And then just related to stranded cost, I believe can you remind me the timing of standard costs that are reflected in your current rates. When those are expected to roll off maybe the amount?

Philip Lembo

We will continue to recover standard costs this year 2012 through 2013 into 14.

David Paz – Bank of America Merrill Lynch

Okay, okay. And do you know the aggregate amount (inaudible). Thank you.

Philip Lembo

Welcome.

Operator

And ladies and gentlemen, this concludes the Q&A portion of the call. I’d now like to turn the presentation back over to Mr. Jim Judge for closing remarks.

James J. Judge

Before ending the call, I’d like to remind you that we remain very focused on successfully executing our operating plan for 2011. We are fully committed to providing outstanding service quality for our customers and strong financial results for our shareholders. I’d also like to reiterate that we do remain very enthusiastic about the merger and the significant benefits it will bring to customers, shareholders and the community served. I’m very confident that we will successfully complete the final approvals process and close the transaction later this year. That concludes our call for this morning. Thank you very much for joining us. And have a great weekend.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect and enjoy the rest of your weekend.

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: NSTAR Management Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts