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NSTAR (NYSE:NST)

Q4 2011 Earnings Call

January 27, 2012 09:00 AM ET

Executives

Jim Judge – SVP and CFO, NSTAR

John Moreira – Investor Relations

 Phil Lembo – Vice President and Treasurer

Analysts

Maurice May – Power Insights

Caroline Bone - Deutsche Bank

David Paz – Bank of America Merrill Lynch

Mark Barnett – Morningstar Financial Company

Operator

Good day Ladies and Gentlemen, and welcome to the Fourth Quarter 2011 NSTAR Earnings Conference Call. My name is Janeta and I will 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.

John Moreira

Thank you and good morning everyone. I would like to welcome you to NSTAR’s conference call to discuss our reported earnings for the fourth quarter and the full year of 2011. We will also provide an update on the mergers progress. 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 conference call will contain forward-looking statements within the meaning of Federal Security Laws. These forward-looking statements may contain statements about the benefits of the merger transaction, whether and when the transaction will be consummated, the combined company’s plans and other statements that are not historical facts.

You are cautioned that such forward-looking statements with respect to the business of NSTAR independent 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 due to developments or otherwise. I refer you to the cautionary language regarding forward-looking statements and other matters included in our merger related filings. I also refer you to the risk factors disclosed at the NSTAR and North East Utilities included in their proxy statement dated January 5, 2011 and subsequent reports filed with the Securities and Exchange Commission. You are urged to read these materials which 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 will turn the call over to Jim Judge, NSTAR’s CFO.

Jim Judge

Thanks John. And let me also welcome everyone to today’s call. Yesterday we reported fourth quarter results for 2011 of $0.53 which is adjusted to exclude the cost of $0.01 per share associated with the pending merger with North East Utilities. And it compares to $0.49 for the same period last year that was adjusted by $0.04 for onetime items related to the merger and the sale of our district energy business. This results in an increase for the quarter of $0.04.

Primary positive drivers for the $0.04 increase include three items. Each one of these three items contributed above $0.03 to earnings for the quarter. They include; higher transmission revenues as a result of projects being completed during the quarter, that gave us $0.03. Second, an increase in lost base revenues associated with energy efficiency programs, reflecting the incremental energy efficiency provided to customers as part of the three year State wide program, that gave us $0.03 as well. Third, the final $0.03 item is lower operations and maintenance expense.

Another positive factor for the quarter was higher revenue from our telecommunication operations which contributed $0.01 for the quarter.

The positive impact of these items was somewhat offset by first, a decline in revenues from our gas operations as gas sales declined 14.2% impacting earnings by $0.03. Second, a 1.8% decrease in electric sales which reduced earnings for the quarter by $0.02. Both of these sales declines reflect the impact of mild weather conditions, as heating degree days in our region declined by more than 20% for the quarter compared to last year. Third, an increase in depreciation and property taxes which negatively impacted earnings by $0.02 driven by our continued investments in the electric and gas system infrastructure. In closing out the reconciliation for the quarter is a positive $0.01 attributed to all other operating items.

Just a quick comment on the local economy. Economic conditions here in Massachusetts are improving and continue to be better than economic conditions at the national level. Our State’s unemployment rate of 6.8% is the lowest it's been in three years and compares very favorably to the national rate of 8.5%. Current employment levels here in Massachusetts have improved since the start of the year, and have grown at a faster pace than US employment levels over the same period. An encouraging trend for us that should help us going forward.

Now I’ll cover the most significant factors that affected the full year 2011 earnings results. After excluding nonrecurring items from 2010 and merger related costs from 2011 and 2010, adjusted earnings per share for 2011 amounted to $2.65 compared to $2.56 last year, an increase of 3.5%. This result was in line with both our guidance range of $2.60 to $2.75 and Wall Street’s expectations.

There were essentially five elements that on a net basis contributed to the $0.09 improvement in the earnings for 2011. They were the following. First, an increase in transmission revenues related to the growth in our investment base that provided about $0.10 for the year.

Second, an increase in lost base revenues and related incentives that reflect the additional energy savings we provided to customers through our efficiency programs, added $0.07 to earnings for the year.

Third, lower interest costs contributed $0.05 and resulted from both lower rates and lower debt levels.

Somewhat offsetting these three positive factors was the increase in depreciation and property taxes which lowered earnings by $0.08 for the year and is a function of continued investment in our electric and gas system infrastructure to maintain a very high level of service quality and reliability for customers.

And lastly, we had higher operations and maintenance expense which negatively impacted earnings by $0.05.

Not only am I very pleased with these financial results, but also with our very positive operating results and levels of reliability and customer service. The year was certainly not without its challenges as severe storms battered our service territory. Our employees responded extremely well in the face of these conditions, safely completing an extraordinary amount of restoration work to bring our customers’ power back as quickly as possible. In fact, in 2011 while we were hit with three major storms, each one resulting in states of emergency being declared in Massachusetts, NSTAR’s restoration efforts were top notch in each instance.

Overall, we achieved very positive service quality performance in 2011. Reliability and restoration, very significant measures of service quality in our industry were very strong again this year.

The average number of months between interruptions for 2011 was 15.8 months compared to 14.8 months last year. And when customers did experience an outage on average, it took 77 minutes for our crews to restore this service. These outstanding results put us in the top quartile of the industry.

We have been just as effective on the gas side of our business as we posted very good gas emergency response rates, responding to 99.4% of all emergency calls within an hour in 2011.

In addition, we achieved top-tier performance for call center, billing and meter reading performance measures. All are in the top quartile of our industry and above our service quality is to the service quality goals for the year.

So some outstanding operating results in a challenging year and I must say our customers have taken notice.

In satisfaction, surveys conducted by JD Power and Associates, our gas company has moved to the top of the Residential Customer Satisfaction Rankings, number one in our peer group.

Also this year our electric company placed among the very best in the North East region.

Now I would like to cover some positive development regarding a significant transmission project for NSTAR that I have mentioned before. Our Cape Cod line is a 31 mile, 345 KB transmission line that will cross the Cape Cod Canal and help to improve reliability for our customers in Cape Cod especially during the peak summer months.

Earlier this month, the Energy Facility Citing Board in Massachusetts voted unanimously to direct its staff to draft a decision approving the project as presented by the company. Another recent notable milestone for that project was achieved on January 19th when the Cape Cod Commission unanimously approved the project. The estimated cost of the project is about $110 million. The line is expected to be in service by the end of this year or early 2011 depending on the timing of the final regulatory approvals.

Our 2012 transmission expenditures are estimated at about $190 million and include spending for this project. We typically provide EPS guidance for the upcoming year in this fourth quarter earnings report, but this isn’t a typical year. As we discussed in November at the EEI conference, in anticipation of closing up pending merger with Northeast Utilities, we will not be providing standalone earnings guidance for INSTAR. Shortly after the close, we plan to hold an analyst day to discuss the combined company’s prospects for the future.

Now I’ll comment on a topic that everyone remains very much interested in, our pending merger with Northeast Utilities. During this past year, we secured several approvals required to complete our merger with NU. In December 2011, the merger received the consent of the Nuclear Regulatory Commission required because of the company’s equity ownership in decommissioned nuclear facilities. This represents one more regulatory hurdle that’s been cleared.

On January 6th, the companies and other parties to the merger proceeding participated in oral arguments on the Department of Energy Resources’ previously filed motion to stay the merger before the Mass DPU. During this process, the DOER withdrew its previous request for a rate review, certainly a positive and appropriate development from our perspective. The DPU procedural process is completed and the issuance of a timely order from the DPU would allow the merger to close prior to the April 16th merger contract deadline.

On January 18th, Connecticut’s public utility regulatory authority issued a final decision regarding jurisdiction over the merger in which it reversed its earlier decisions that it did not have regulatory jurisdiction over the merger and will now review our merger transaction. The companies immediately filed a merger application with the authority on January 19th and the authority immediately issued a procedural schedule that includes a draft decision date of March 26th and a final decision date of April 2nd.

We continued to work towards completing the merger to ensure that the substantial benefits of the transaction can be achieved for customers. We believe that we have provided strong evidence in support of the merger and have clearly demonstrated that the merger will provide substantial benefits for customers.

In our net benefits analysis that we filed with the Massachusetts DPU, we indicated that customers across all jurisdictions would expect to realize net savings of approximately $784 million within the first 10 years.

That concludes my formal remarks. Now I’ll be happy to take any questions that you may have.

Question-And-Answer Session

Operator

Thank you. (Operator instructions). Your first question comes from the line of Maurice May with Power Insights. Please proceed.

Maurice May – Power Insights

Yes. Good morning folks.

Jim Judge

Hi Maurice.

Maurice May – Power Insights

At the Massachusetts DPU hearing on January 6th, the chairman asked your representatives for an estimate and really a dollar figure estimate of synergy savings that could accrue to Massachusetts customers and your representative then said there would be a reply and that’s been actually three weeks today and I was just wondering where that reply or the status of that reply.

Jim Judge

Well, the DPU did not set a deadline specifically. We are considering a number of alternative proposals. I think that comment that discussion took place in early January, the first week of January. Understand we have a timeline in Connecticut, Maurice, that you’re aware of I think. The Connecticut timeline came out January 20th.

Maurice May – Power Insights

Yes.

Jim Judge

So the urgency in terms of getting a response in quickly is less. We want to make sure that our offer does address the DPU’s interest and is reasonable from the company’s perspective. So we continue to work on it, but there’s no date certain in terms of the timing of that filing.

Maurice May – Power Insights

Okay. Thanks.

Jim Judge

You’re welcome.

Operator

Your next question comes from the line of Caroline Bone with Deutsche Bank. Please proceed.

Caroline Bone - Deutsche Bank

Hi. Actually Maurice just asked my question, but maybe I’ll ask another one. Since you aren’t providing guidance for the full year, could you at least address maybe at a high level what sort of drivers we should be thinking about for 2012 on a standalone basis.

Jim Judge

Sure. We obviously do continue to invest in transmission and I think as I mentioned in my remarks, we expect to have a capital expenditure budget of $190 million in 2012. We expect continued economic recovery that we’ve been experiencing and 2012 should provide some sales growth. We do have a PBR adjustment of $8 million under our current rate settlement that went into effect January 1st and the only other comment I guess I’d make is that as you may know Caroline, we’re very good at keeping O&M costs in line and you could expect that to continue.

Caroline Bone - Deutsche Bank

Okay, great. Thanks a lot.

Jim Judge

Welcome.

Operator

Your next question comes from the line of David Paz with Bank of America. Please proceed.

David Paz – Bank of America Merrill Lynch

Morning.

Jim Judge

Hi David.

David Paz – Bank of America Merrill Lynch

Hi. A couple of my questions have been asked and answered, but I do have another on Northern Pass. When do you expect or when do you and NU expect to announce an alternative group?

Jim Judge

I think we’ve been pretty consistent at NSTAR in the past and we’re going to defer all Northern Pass questions to Northeast Utilities. They clearly are the lead partner in this transaction. I’m sure that Lee and Chuck and David will be providing some insights at their conference call in a few weeks and they’re certainly closer to the specifics than I am.

David Paz – Bank of America Merrill Lynch

Okay, understood. Separate question then. On the plant transmission CapEx of $190 million, does that include any Northern Pass spend?

Jim Judge

It does not.

David Paz – Bank of America Merrill Lynch

Okay. And just so I know, what was your 2011 transmission CapEx spend?

Jim Judge

It was $162 million.

David Paz – Bank of America Merrill Lynch

Okay. All right. Oh and rate based for the year-end ’11 both for transmission and distribution? Do you have those numbers and if so can you provide them?

John Moreira

Sure. David, this is John. Transmission rate base was $800 million as of ’10.

David Paz – Bank of America Merrill Lynch

Oh, as of 2010?

John Moreira

’10 and it’s approximately $900 million as of ’11, at the end of ‘11.

David Paz – Bank of America Merrill Lynch

Okay. And then on the distribution side?

John Moreira

Yeah. I think it stays around the 2.6 range.

David Paz – Bank of America Merrill Lynch

Around 2.6, okay. All right. And just one last thing on 2012 drivers. Do you plan any debt issuances?

John Moreira

We have a maturity in 2012, David and we’ll need to take care of that. But that’s our plan.

David Paz – Bank of America Merrill Lynch

Okay, great. Thank you so much.

Operator

(Operator instructions). Your next question comes from the line of Mark Barnett with Morningstar Financial Company. Please proceed.

Mark Barnett – Morningstar Financial Company

Hey, good morning.

Jim Judge

Hey Mark.

Mark Barnett – Morningstar Financial Company

Quick question. In the drivers for the quarter and for – I guess actually it’s the full year, could you break out from usage the impact of the PBR adjustment for 2011?

John Moreira

Yeah. It was 1.6 million. It was a reduction, slight reduction in ’11 and as Jim mentioned, effective 1/1/12, it’s 0.96% which amounts to about $800 million. $8 million, I’m sorry.

Jim Judge

So in 2011 we actually – the PBR adjustment was negative 1.6 million. In 2012 we have a positive adjustment due to the PBR which is $8 million.

Mark Barnett – Morningstar Financial Company

Okay, thanks for that. And then just real quickly on Massachusetts. With that merger savings I guess request, is there anything else outstanding that you need to get out of the way with the Massachusetts regulator before they issue an opinion?

Jim Judge

No. the procedural schedule has been completed. We made our filing. There was over 1000 data requests. It was very robust record I would say. We had hearings throughout July. The briefs and the reply briefs are filed. So the only open item I guess on the record potentially is a response to that request from the department.

Mark Barnett – Morningstar Financial Company

Okay. Thank you.

Operator

And at this time we have no further questions. I would now like to turn the call back over to Jim Judge for any closing remarks.

Jim Judge

Before ending the call, I’d like to remind you that we do remain very focused on providing outstanding service quality that our customers expect from us and this remains our number one priority. At the same time we continue to work diligently to close the merger with Northeast Utilities. That concludes our call. Thank you all for joining us this morning and have a great weekend.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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