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NSTAR (NYSE:NST)

Q3 2007 Earnings Call

October 26, 2007 9:00 am ET

Executives

Philip Lembo - Assistant Treasurer

Jim Judge - Chief Financial Officer

Analysts

Chris Ellinghaus - Wall Street Access

Bill Apacelli - Citi Investment Research

Ted Durbin - Goldman Sachs

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2007 NSTAR earnings conference call. (Operator Instructions) I'd now like to turn the presentation over to your host for today's call, Mr. Philip Lembo, Assistant Treasurer, NSTAR.

Philip Lembo

Good morning, everybody and welcome to NSTAR's conference call to discuss our reported earnings for the third quarter of 2007.

Before we get started, with Jim Judge, NSTAR's CFO, let me just say that this conference call contains some forward-looking statements that involve risk and uncertainties and that these statements are based upon our current expectations, estimates and projections of management, and they are not guarantees of future performance. Actual results or outcomes could differ materially.

We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related topics in reports we make to the Securities and Exchange Commission.

Thankfully, that concludes my opening comments and I'll turn the call over to Jim Judge.

Jim Judge

Thanks, Phil. Let me also welcome everybody. Yesterday we reported our third quarter results. Overall, we had a solid quarter from an earnings perspective, in line with our expectations.

Consistent with results from the first quarter and second quarter, revenues associated with our seven-year rate plan, which was implemented on January 1, 2006 and transmission revenues continued to play an important role in our performance.

Reported earnings per share for the third quarter were $0.79, compared to $0.72 for the same period last year. That's an increase of $0.07, or 9.8%. There were several factors that contributed to this increase. Consistent with previous quarters, we picked up $0.04 in the current quarter as a result of higher distribution revenues.

These revenues primarily reflect the benefit of the performance-based rate adjustment on electric sales that was implemented on January 1, 2007 and to a lesser extent, a nearly 1% increase in electric sales. Also, the energy mitigation incentive added $0.01 in the quarter. As I emphasized before, our customers have received no increase in the delivery portion of their bill since we implemented the new distribution rates effective May 1st of 2006, because any increase in the distribution rate is offset with an equal reduction in the transition rate.

Our customers' delivery rate will remain flat for seven years. Let me say that again. As a result of our seven-year rate plan, our customers’ energy delivery prices remain the same through 2013.

Another factor that had a positive impact on our earnings for the quarter was the $0.05 increased in transmission revenues. This reflects a higher level of transmission investments.

A third factor that a positive impact on the quarter was interest income associated with certain tax matters that contributed $0.03 to earnings for the quarter.

There were three primary factors that had a negative impact on the quarter’s results:

  1. An increase in OEM costs driven by higher labor-related costs; insurance costs and bad debt expense reduced earnings for the period by $0.04.
  1. A decline in the contribution from our non-utility operations amounted to $0.02, due to the absence of a favorable claim settlement with a third party that occurred in the third quarter last year at our advanced energy systems facility.
  1. Finally there was a $0.01 negative impact related to higher depreciation costs, which is a function of our ongoing investment in our electric and gas infrastructure.

Rounding out the reconciliation is a $0.01 pick up from all other items.

At this point, I'd like to talk a little bit about our operating performance here at NSTAR. All important reliability and customer service performance measures continue to reflect very high levels of performance on a year-to-date basis and are even stronger than last year.

Our electric reliability measure, which is based on the number of months between service interruptions, has improved 16% compared to the same period last year. Another critical performance measure that has improved over the last year relates to electric service restoration after an outage. The average time it took to restore service to customers over the past nine months improved 17%. Our call answer rates have also improved over last year. These results are very encouraging, and exemplify our commitment to delivering great service and they meet or exceed state mandated service quality targets.

Clearly the investments that we have made of more than $1 billion over just the last three years to provide superior customer service are paying off. The reliability and customer service performance measures that I just described to you remain at very high levels and compare very favorably with our peers and reflect top quartile performance. Performance like this is key to our continued and future success.

Now, I'd like to talk a little bit about our expectation for the remainder of the year. We expect to be somewhere in the middle of the $2.02 to $2.12 earnings per share range. This is no change from our previous guidance.

So what are we expecting in the fourth quarter? First I'll discuss O&M. In our original guidance in January, we indicated that we expect O&M costs to increase in 2007. Although we actually saw lower O&M costs through the first half of the year, we started to see the expected O&M increases in the third quarter, as O&M was a $0.04 drag to earnings. We expect to see increases in O&M costs continue in the fourth quarter, as our expected staffing levels will be higher than we began the year with.

With respect to sales, we experienced a 13% decline in gas sales in the fourth quarter of 2006. Heating degree days were about 18% below normal in that quarter. Our earnings guidance is based upon normal weather conditions in the fourth quarter, and for any of you lucky enough to watch the Red Sox play, you know that we been experiencing mild weather conditions thus far the fourth quarter of 2007.

In terms of regulatory expectations, we expect to receive approval for our $19 million energy incentive filing from the DPU. This would result in $6.3 million of pretax revenues in 2007, 2008 and 2009. We are currently booking to that level and are expecting to do so in the fourth quarter as well.

In the second quarter conference call, I talked about the decoupling proceeding that was opened in June by the DPU. Interested parties filed comments on this issue in September, and earlier this week participated in panel discussions to open up a dialogue on the subject. We anticipate that this process will continue to evolve and at this point in time, it is still much too early to determine how it will be resolved.

The panel discussions are being held over a six-day period that began on October 23rd and will conclude on November 2nd when panelists can provide closing statements. Following these hearings, participants may file comments with the DPU. The deadline established for filing those comments is December 3rd. After reviewing those comments, the DPU will determine the appropriate next steps for this proceeding.

This concludes my formal remarks. Now I'd be happy to address any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chris Ellinghaus - Wall Street Access.

Chris Ellinghaus - Wall Street Access

Jim, I didn't recall you mentioning what the weather looked like or temperatures for the quarter?

Jim Judge

Cooling degree days were up 3.9% over the prior year and that's up about 8% over normal.

Chris Ellinghaus - Wall Street Access

Can you just remind us about all of the incentive mechanisms, and what the maximums are? Particularly the customer incentive and where you feel you stand so far this year?

Jim Judge

On the energy litigation incentive, I think that's the one you are referencing?

Chris Ellinghaus - Wall Street Access

That one, and isn't there like a $1 million for some customer benchmarks or reliability benchmarks?

Jim Judge

Yes, there's the poor performing circuit metric, we referenced it. Our performance, as I mentioned, has been excellent so we anticipate booking that $1 million, roughly, of incentives. The energy incentive I mentioned, we are booking at $6 million this year and we expect approval from the department on that December 1.

Chris Ellinghaus - Wall Street Access

The max on there is $19 million, if I'm not mistaken?

Jim Judge

The maximum in this proceeding is $19 million, which is $6.3 million for three years. But the actual mechanism itself, we will file subsequent requests that actually could cap out at about $20 million a year, maximum.

Chris Ellinghaus - Wall Street Access

As far as your comments about being in the middle of your $2.02 to $2.12 range, thus far for the year suggests that you’ll be towards the upper end of the range and you had some rather extremely mild weather last year. I'm having a little difficulty reconciling the two issues. Are you expecting a similar kind of run rate in terms of the incremental impact on O&M, or is it going to be more extreme than that?

Jim Judge

It's not going to be more extreme than that, but we do have O&M costs increase in the quarter. When I look back over the last four or five years, I think the best fourth quarter that we've had is $0.38. In spite of the run rate year-to-date, I think a number in that order of magnitude would put us in the middle of that range.

Again, to date, we've had some mild weather. October has been milder than normal, so we could be higher in the range as you expect if things go well, but our base assumption is the middle of the range.

Operator

Your next question comes from Bill Apacelli - Citi Investment Research.

Bill Apacelli - Citi Investment Research

A follow up on the energy mitigation filings. I know that you are looking to resolve the $19 million for this year. When would we expect you guys to file again? I know you've had some must run(NYSE:MR) contract cancellations this year with Mystic River and what not. You filed in November of last year. I know it takes a while to get resolved, but would that be forthcoming soon?

Jim Judge

Yes, our preference would be to get through the cycle completely once. To the extent there's some lessons learned or guidelines from the department, we would obviously want to incorporate that in our subsequent filings.

We do have plans to make a subsequent filing involving what we've been able to save customers for a must run contract over at the Mystic plant. We are close enough to get in the order on the first one and then we intend to come in shortly thereafter with the second one.

Bill Apacelli - City Investment Research

How has the economy been holding up there, regarding the slowdown in housing? Has that had any impact in terms of your sales or what you think your longer-term outlook would be going into next year?

Jim Judge

Yes, our sales this year are only up a little over 1%. I think the long run, run rate for the company has been a 2% number. So I think, there is a little bit of an economic impact in there and conservation trends as well with customers. We’ve said before we actually have a pretty solid customer base. When you look at our sales base, the commercial sector is the big driver. Fortunately, the universities, the hospitals, the state buildings that we have continue to use the same amount of energy.

We see ourselves a little bit less influenced by economic downturns. Vacancy rates have actually improved to a level of 11.5%, which is a little better than it was a year ago, so pretty steady state.

Bill Apacelli - City Investment Research

Where do you guys stand with the relationship you had with Evergreen and any of the other things, maybe you are doing in terms of DSM or other mechanisms you are looking at? Any other dealings you may have going on?

Jim Judge

We have an administration who is keenly interested in promoting the renewable sector and the company has been advocating and providing support for that. There is the Evergreen solar relationship where a solar panel manufacturer is building a facility in the state and NSTAR has offered to help facilitate the installation of those.

The work plan, if you will, continues to evolve. There are no specifics to report there. We are also working with the Cambridge Energy Alliance, which is a major effort over in Cambridge to make the entire city energy efficient.

So there's work going on and it continues to be a priority, but there's really nothing to report from a financial impact perspective.

Operator

Your next question comes from Ted Durbin - Goldman Sachs.

Ted Durbin - Goldman Sachs

On the decoupling proposal, can you comment on what the impact might be on your current rate plan? I know there are questions out there on whether utilities might have to go back in for a full base rate proceeding.  Maybe just a little more color on that?

Jim Judge

I think it's an easier fix than that, as I see it. There are an awful lot of costs recovered to a lot of different mechanisms: base rate, pension mechanisms, transition rate mechanisms, we have a basic service charge. This to me is a fairly simple adjustment that could be made where you would calculate the lost base revenues from energy efficiency and just adjust rates and reconcile it on a regular basis annually; most likely it will be an annual process.

I'm not sure that you need any kind of a full rate review to accomplish that. I think we are confident that our seven-year rate settlement continues to provide customers the benefits that it was designed to do so we are confident that it will continue to be in place.

Ted Durbin - Goldman Sachs

You said there's been commentary and panel discussions. Can you characterize the different parties and the positions that they are taking?

Jim Judge

We had 32 or 33 parties, something like that. Two-thirds of them were in favor of decoupling, one-third were opposed. Generally I think you saw some customer groups who are the most price sensitive that advocated against it. A lot of the utilities, the environmentalists were in favor of decoupling, so the comments are along those lines.

As I said, in December we will submit statements and the department will make a decision on guidelines and then implementing those guidelines for each company will probably take a fair part of 2008 to achieve, as I'm sure there will be individual implementations for every utility.

Ted Durbin - Goldman Sachs

In terms of any kind of new transmission projects, have you guys done any more studies or been speaking with ISO New England about any other big projects that might be needed in your service territory?

Jim Judge

I think we are spending roughly $100 million this year and $100 million next year is the guidance that we have given, and in the budgeting and planning process we do see opportunities, but I wouldn't call them major. There are transmission investments down the Cape that we are looking at and a few other areas. Certainly it's unlikely, what we are looking at is unlikely to be the $100 million we have for this year and next, but it could be half that number.

Operator

There are currently no further questions in the queue. I will now turn the call back over to Mr. Jim Judge for closing remarks.

Jim Judge

In closing, I'd like to remind you that Tom May, Phil Lembo and I will be at the upcoming EEI financial conference in a couple of weeks. You may recognize us, we will either have the Red Sox World Championship hat on or the undefeated Patriots hat on or the Boston College National Championship hat on.

Our company presentation will be given by Tom May, at the 7:30 am session on Tuesday, November 6. Hope to see you at the conference. For those of you who will not be attending in person, our presentation will be webcast and available on our website at www.NSTAR.com. Thank you for your time this morning.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.

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