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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 quarter2007 NSTAR earnings conference call. (Operator Instructions) I'd now like toturn 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 conferencecall to discuss our reported earnings for the third quarter of 2007.

Before we get started, with Jim Judge, NSTAR's CFO, let mejust say that this conference call contains some forward-looking statementsthat involve risk and uncertainties and that these statements are based uponour current expectations, estimates and projections of management, and they arenot guarantees of future performance. Actual results or outcomes could differmaterially.

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

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

Jim Judge

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

Consistent with results from the first quarter and secondquarter, revenues associated with our seven-year rate plan, which wasimplemented on January 1, 2006 and transmission revenues continued to play animportant 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 asa result of higher distribution revenues.

These revenues primarily reflect the benefit of theperformance-based rate adjustment on electric sales that was implemented onJanuary 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 Iemphasized before, our customers have received no increase in the deliveryportion of their bill since we implemented the new distribution rates effectiveMay 1st of 2006, because any increase in the distribution rate is offset withan equal reduction in the transition rate.

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

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

A third factor that a positive impact on the quarter wasinterest income associated with certain tax matters that contributed $0.03 toearnings for the quarter.

There were three primary factors that had a negative impacton 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 allother items.

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

Our electric reliability measure, which is based on thenumber of months between service interruptions, has improved 16% compared tothe same period last year. Another critical performance measure that hasimproved over the last year relates to electric service restoration after anoutage. The average time it took to restore service to customers over the pastnine months improved 17%. Our call answer rates have also improved over lastyear. These results are very encouraging, and exemplify our commitment todelivering great service and they meet or exceed state mandated service qualitytargets.

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

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

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

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

In terms of regulatory expectations, we expect to receiveapproval for our $19 million energy incentive filing from the DPU. This wouldresult in $6.3 million of pretax revenues in 2007, 2008 and 2009. We arecurrently booking to that level and are expecting to do so in the fourthquarter as well.

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

The panel discussions are being held over a six-day periodthat began on October 23rd and will conclude on November 2nd when panelists canprovide closing statements. Following these hearings, participants may filecomments with the DPU. The deadline established for filing those comments isDecember 3rd. After reviewing those comments, the DPU will determine theappropriate next steps for this proceeding.

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

Question-and-AnswerSession

Operator

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

Chris Ellinghaus -Wall Street Access

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

Jim Judge

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

Chris Ellinghaus -Wall Street Access

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

Jim Judge

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

Chris Ellinghaus -Wall Street Access

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

Jim Judge

Yes, there's the poor performing circuit metric, wereferenced it. Our performance, as I mentioned, has been excellent so weanticipate booking that $1 million, roughly, of incentives. The energyincentive I mentioned, we are booking at $6 million this year and we expectapproval 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 $6.3million for three years. But the actual mechanism itself, we will filesubsequent 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 $2.02to $2.12 range, thus far for the year suggests that you’ll be towards the upperend of the range and you had some rather extremely mild weather last year. I'mhaving a little difficulty reconciling the two issues. Are you expecting asimilar kind of run rate in terms of the incremental impact on O&M, or isit going to be more extreme than that?

Jim Judge

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

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

Operator

Your next question comes from Bill Apacelli - Citi InvestmentResearch.

Bill Apacelli - CitiInvestment Research

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

Jim Judge

Yes, our preference would be to get through the cyclecompletely once. To the extent there's some lessons learned or guidelines fromthe department, we would obviously want to incorporate that in our subsequentfilings.

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

Bill Apacelli - CityInvestment Research

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

Jim Judge

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

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

Bill Apacelli - CityInvestment Research

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

Jim Judge

We have an administration who is keenly interested inpromoting the renewable sector and the company has been advocating and providingsupport for that. There is the Evergreen solar relationship where a solar panelmanufacturer is building a facility in the state and NSTAR has offered to helpfacilitate the installation of those.

The work plan, if you will, continues to evolve. There areno specifics to report there. We are also working with the Cambridge EnergyAlliance, which is a major effort over in Cambridgeto 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 - GoldmanSachs

On the decoupling proposal, can you comment on what theimpact might be on your current rate plan? I know there are questions out thereon 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 arean 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 calculatethe lost base revenues from energy efficiency and just adjust rates andreconcile it on a regular basis annually; most likely it will be an annualprocess.

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

Ted Durbin - GoldmanSachs

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

Jim Judge

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

As I said, in December we will submit statements and thedepartment will make a decision on guidelines and then implementing thoseguidelines 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 - GoldmanSachs

In terms of any kind of new transmission projects, have youguys done any more studies or been speaking with ISO New England about any otherbig 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 budgetingand planning process we do see opportunities, but I wouldn't call them major. Thereare transmission investments down the Cape that we arelooking at and a few other areas. Certainly it's unlikely, what we are lookingat is unlikely to be the $100 million we have for this year and next, but itcould be half that number.

Operator

There are currently no further questions in the queue. Iwill 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 Lemboand 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 onor the undefeated Patriots hat on or the Boston College National Championship haton.

Our company presentation will be given by Tom May, at the 7:30 am session on Tuesday, November 6. Hopeto 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. Thisconcludes the presentation. You may now disconnect and have a wonderful day.

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