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Central Vermont Public Services Corp. (NYSE:CV)

Q3 2007 Earnings Call

November 5, 200710:00 am ET

Executives

John Tello - Tello, Inc.

Robert H. Young - President, Chief Executive Officer andDirector

Pamela J. Keefe - Chief Financial Officer, Vice President,Treasurer

Analysts

Daniele Seitz - Dahlman Rose &Co.

Operator

Welcome to the third quarter 2007 Central Vermont PublicServices earnings conference call. My name is Katina and I will be yourcoordinator for today. (Operator Instructions) I would now like to turn thepresentation over to your host for today’s call, Mr. John Tello. Pleaseproceed.

John Tello

Thank you, Katina and welcome to Central Vermont PublicServices’ 2007 third quarter earnings teleconference, my name is John Tello,President and CEO of Tello, Inc. We are Central Vermont’s investor relationsconsulting firm and I am pinch hitting for Ann Warrell who is out today onmaternity leave.

Before I begin, I would like to point out to you that we maybe discussing certain subjects related to our 2007 third quarter earnings thatmay contain forward-looking statements. I would caution you that actual resultscould differ materially from those expressed in such forward-looking statementsand I refer you to our Safe Harbor language that is contained in the revised2007 third quarter earnings press release that we issued this morning, whichincludes the corrected reconciliation of earnings on page three.

This release appears on our website at www.cvps.com, alongwith the slide that will be referred to throughout today’s call. Also duringthe call today, we’ll be discussing earnings per share, which in all instances isin reference to diluted shares of common stock.

On the call this morning are Central Vermont’s President andChief Executive Officer, Bob Young, and Vice President, Chief Financial Officerand Treasure, Pam Keefe. Bob will begin with an overview of the company’searnings and an update on corporate and strategic developments. Pam will thendescribe the third quarter financial results in detail. We will then leave timefor a Q&A session to answer your questions at the conclusion of the call.

I would now like to turn the call over to Bob.

Robert H. Young

Thank you, John, and welcome, everyone. On Friday, wereported 2007 third quarter consolidated earnings of $4.3 million, or $0.41 pershare of common stock. This compares to third quarter 2006 consolidatedearnings of $7 million, or $0.66 per share of common stock.

For the first nine months of 2007, we reported consolidatedearnings of $10.5 million, or $0.99 per share of common stock. This compares toconsolidated earnings of $12.1 million, or $1.07 per share of common stock forthe first nine months of 2006.

Increased transmission costs, a de-rate and outage at theVermont Yankee plant, and several major storms have presented significantchallenges this year, but despite these challenges, we expect to meet ourpreviously stated earnings guidance of $1.35 to $1.45 per share. Pam willprovide a detailed analysis of our third quarter results in a few minutes.

We continue to make progress on customer service quality andreliability. JD Power and Associates, the global marketing and surveyingcompany, recently ranked Central Vermont Public Services first among similarutilities in a survey on customer service. CVPS ranked well above the eastregional average, which includes utilities of all sizes. For overall customersatisfaction, CVPS ranked in the top third of utilities in the east region,more than 30 points above the regional average, and I am pleased to note thecompany ranked first among similarly sized utilities in the Northeast for priceand value, company image, billing, and customer service.

To maintain that level of customer satisfaction, we areinvesting substantially in improving our distribution and transmission systemsand these investments will ultimately benefit investors as well. I’ll talk moreabout that in a minute.

But first, let me provide an overview of some of our keystrategic activities. Turning to slides two and three, as you know, we filedfor a 4.46% rate increase last spring and in August, we filed an alternativeregulation plan with the Vermont Public Service Board. These two cases are nowessentially intertwined. Both are important to our progress.

Over the past month, we have been in negotiations with theDepartment of Public Service on a possible settlement of both cases. Someprogress has been made but we have not reached agreement at this point oneither the rate case or the alt reg plan.

Both the state and CVPS are focused on controlling costs forcustomers. It is possible we will reach settlement for several parts of therate case. If a settlement is reached, new rates could go into effect earlynext year.

How alt reg will be implemented will be determined followinga review by the Public Service Board with the board having 12 months to decidethat case. This would make the alt reg plan effective in the latter part of2008, or possibly beginning in 2009.

Another key part of our strategic planning is focused oncontinued investments in VELCO, the statewide transmission company in Vermont.We invested $23 million in VELCO in 2006 and are continuing to study ouroptions for further equity investments later this year. Depending on thechoices made by other utilities, we could increase our investment by $50million by year-end. As you know, investments we make in VELCO earn a FERCallowed return of 11.5%.

Meanwhile, we continue to focus extensively on our powersupply options for the coming years, with efforts targeted on several fronts.

Turning to slide four, the state has begun a comprehensiveeffort to reach out to the public to hear its thoughts on how Vermont shouldreplace its existing power supply when our contracts with Hydro-Quebec andVermont Yankee end in the coming years. Five public meetings in which weparticipated have been held around the state, during which participants heardfrom an expert panel, talked in small groups, and ultimately voted on theirpreferences.

The meetings were followed by a two-day retreat for 200randomly selected Vermonters this past weekend. Participants got an intensiveeducation about energy issues and then voted for their preferences. Data fromthe five previous meetings will be compiled with the results from this pastweekend’s event and together will give us solid insights into Vermonters’concerns and priorities regarding energy supply, as we continue to study ouroptions.

In addition, a feasibility study for constructing newgeneration is underway. Concentric Energy Advisors recently completed phase oneof the study. CV Power Supply staff led this effort in cooperation with theother Vermont utilities. Phase two of this study is focused on inventoryingexisting and potential upgrades to Vermont’s gas supply and transmissioninfrastructure to complement new intake generation and is expected to becompleted later this month.

The last phase of this study will examine Vermont’spermitting requirements and feasibility related issues. The results of thisthree phase study will identify what is feasible and what is not.

As you know, much of our power supply, including contractswith Hydro-Quebec and Vermont Yankee are scheduled to end between 2012 and2016. These are low-priced, reliable energy resources which are among theprimary reasons that CVPS’ rates are so competitive compared to the rest of NewEngland.

We have already begun talks with Hydro-Quebec and VermontYankee about new power supply options. CVPS, Green Mountain Power, the VermontPublic Supply Authority, and HQ production are using a steering committeestructure to develop background materials, terms and supporting actions neededin negotiations for future power purchases from Hydro-Quebec.

We have agreed to target completion of proposed draft termsby year-end 2008. We expect that this will coordinate well with the completionof Vermont’s participatory public engagement process, the generation feasibilitystudy, and Vermont Yankee talks expected to conclude in 2008.

Now I would like to turn things over to Pam Keefe, who willexplain our third quarter financial results in depth. Pam.

Pamela J. Keefe

Thanks, Bob. For an overview of the third quarter, pleaserefer to slide five. Third quarter 2007 net income decreased by $2.7 million,or $0.25 per share of common stock, compared to the third quarter of 2006. Netincome for the first nine months of 2007 decreased by $1.6 million, or $0.08per share of common stock, compared to the first nine months of 2006.

Net income was largely affected this quarter by two primaryfactors. First, the Vermont Yankee plant de-rate and unplanned outage. InAugust, the Vermont Yankee plant experienced a reduction in output due to thecollapse of one of the cooling towers, and in September, there was a two-dayunplanned outage following a valve failure. We purchased replacement energyadequate to meet most of our hourly load obligations during this period. Theseevents increased our net power cost by about $1 million in the third quarter of2007 through the combination of increased purchased power expense and decreasedresale sales revenue.

Secondly, we experienced two severe storms in August. Thecombined cost to the company of these stores was $1.2 million. For the quarter,operating revenues decreased by $700,000, resulting from a $3.3 milliondecrease in resale sales revenue, partially offset by a $2.6 million increasein retail sales.

Resale sales decreased due to less excess power available,including Vermont Yankee upgrade power that we resold in 2006, and loweraverage market prices compared to 2006.

Retail sales increased largely due to a 4.07% retail rateincrease effective January 1, 2007,and also some customer growth due to service territory acquisitions in thesecond half of 2006.

Purchase power costs decreases $3.1 million, largely due todecreased Vermont Yankee purchases resulting from the de-rate and unplannedoutage in the third quarter, and additional upgrade power that we purchased in2006.

Other items included lower nuclear plant decommissioningcosts and decreased purchases from independent power producers due to loweroutput. These favorable items were partially offset by increased short-termpurchases for Vermont Yankee replacement energy.

Other operating costs increased $7.6 million, largely due tohigher transmission costs resulting from higher rates, partly due to overalltransmission expansion in New England and lower reimbursements under the NEPOOLopen access transmission tariff.

Other items included higher storm restoration costsresulting from the August storm activity and a 2006 reduction of theenvironmental reserve.

Equity and earnings from affiliates increased $700,000 as aresult of the September 2006 additional investment in VELCO. On a year-to-datebasis, operating revenues increased $2.1 million, resulting from a $13 millionincrease in retail sales revenue, partially offset by a $10.9 million decreasein resale sales revenue.

Retail sales increased $8.3 million, resulting from the4.07% rate increase and $4.7 million largely due to an increase in the numberof customers, including two small service territory acquisitions in late 2006and overall customer growth throughout the existing service territory.

Resale sales decreased because there was less excess poweravailable for resale, largely due to Vermont Yankee and Millstone Unit Number 3scheduled refueling outages in the second quarter of 2007, lower Vermont Yankeeoutput in the third quarter of 2007, and additional Vermont Yankee upgradepower that we resold in 2006.

Purchase power costs decreased $6.5 million due to decreasedVermont Yankee purchases for the reasons described previously, lower plantdecommissioning costs, and lower output from independent power producers. Thesefavorable items were partially offset by increased Hydro-Quebec deliveries andhigher short-term purchases for replacement power during the nuclear plantoutages.

Other operating costs increased $13.5 million, largely dueto higher transmission expense, as described previously, higher stormrestoration costs resulting from major storms in April and August 2007,increased bad debt expense, and a 2006 reduction of environmental reserves,partially offset by lower employee benefit costs.

Equity and earnings from affiliates increased $3.1 million,principally due to earnings from VELCO.

For a more in-depth analysis of the company’s third quarter,please refer to our earnings release which was issued on Friday and revisedthis morning.

Looking at slide six, the company’s cash position is alittle lower than our original expectations due to the August storms and theVermont Yankee de-rate and outage. At September 30, 2007, we had cash and cashequivalents of $3.6 million, compared to $3.3 million at September 30, 2006. Webelieve that cash on hand, cash flow from operations, and our $25 millioncredit facility will be sufficient to fund our business over the next year.

As you may recall, after the second quarter of this year, welowered our 2007 earnings guidance from a range of $1.60 to $1.70 per share toa range of $1.35 to $1.45 per share. The primary factors driving this changewere the decline in market prices we have experienced this year and the extraordinarycost of the April storm. As Bob mentioned earlier, we affirm that guidance atthis time.

We plan to give our guidance on 2008 earnings in the firstquarter of 2008. And with that, I would like to turn the call back over to Bob.

Robert H. Young

Thanks, Pam. In conclusion, despite some challenges, wecontinue to make good progress. As shown on slide seven, we are continuing tofocus on customer service and reliability, investments in rate base that willbenefit customers and investors, restoring our corporate credit rating toinvestment grade status, ensuring adequate retail rates, evaluating financingoptions so that we can continue to invest in VELCO, and planning forreplacement power when our long-term power contracts with Vermont Yankee NuclearPower Corporation and Hydro-Quebec expire. In so doing, we continue to positionthe company for a vibrant future.

Thank you for joining us today. At this point, Pam and Iwould be happy to take your questions.

Question-and-AnswerSession

Operator

(Operator Instructions) Representing DahlmanRose, your first question will come from the line of Daniele Seitz. Pleaseproceed.

DanieleSeitz - Dahlman Rose & Co.

Thank you. I just was wondering if I was looking at all ofthe unusual events that happened this year, would you assess that -- I mean, weshould be considering them as non-recurring and obviously will be a positivefor 2008? Or there are some issues like refueling and items such as those thatshould be taken into account for ’08? And I understand you don’t want to giveus indications yet on 2008, but how much would you consider is non-recurring inthe numbers of the last nine months?

Robert H. Young

Daniele, I think in general we would review -- we would feelthat what happened both at Vermont Yankee and with these extraordinary stormsare non-recurring, and there is always a probably you can have a problem with apower plant and there is always a probably that you can have more storm effectin any given year than you might predict.

But these were pretty extreme storms for us and our view isit’s not likely we would see that level of storm again on an annual basis. Socertainly in general, we would say that these occurrences are one-time, or lowprobability of having a storm of the kind of storm we had in August or in Aprilhappening again.

Pam, do you want to try to answer the issue of how much didit cost us in terms of the earnings?

Pamela J. Keefe

Sure. The combined cost of the April and August storms wasabout $4.4 million. So one thing to consider is that in any given year, youmight have a larger number of smaller storms, but certainly those two stormstogether were about $0.26 on an after-tax basis.

DanieleSeitz - Dahlman Rose & Co.

Great. Thank you. Please continue, I’m sorry.

Pamela J. Keefe

I was just going to say and then the VY outage and de-ratecosts about $1.3 million, and as Bob indicated, one never knows but that wasabout $0.06 on a net after tax basis because we were able to offset that costpartially with about $300,000 of a regulatory liability.

DanieleSeitz - Dahlman Rose & Co.

Even if you were not taking into account any of the aspectsof the rate case that is coming up, et cetera, this is the way you will belooking at the unusual events and I was also wondering, you were in New Yorknot too long ago, so obviously they are not major, big new news, but do youthink that after a certain point, you will say well, okay, obviously we cannotreach a settlement, we should go for the full rate case, or if there is nomagic date about that?

Robert H. Young

I think that we are probably far enough along in discussionsat this point to recognize that with regard to both the rate case and the altreg proposal that we ought to continue the process with the public serviceboard at this point in time.

Having said that, however, it doesn’t mean that we couldn’tsettle one or either of the issues. But I think it’s really in everybody’sinterest to keep the regulatory process moving and so that’s what we wouldintend to do.

DanieleSeitz - Dahlman Rose & Co.

Great, and as far as the investment in transmission, itsounds like it is imminent. Can you imagine anything that will make it delayedsignificantly?

Robert H. Young

Pam, do you want to speak to that?

Pamela J. Keefe

Sure. Well, the Public Service Board has given VELCOapproval to issue 133.75 million in membership units and obviously our share ofthat really depends on whether other member owners elect to invest. We estimatethat our share would be about 50 million, and so we continue to move throughour regulatory approval process and do not expect significant delays. We stillenvision making that VELCO investment in December and issuing our juniorsubordinated debt prior to that.

DanieleSeitz - Dahlman Rose & Co.

Great. Thank you so much.

Operator

(Operator Instructions) There are no further questions atthis time. I would now like to turn the call back to management for closingremarks.

Robert H. Young

Thank you very much and if there are no other questions,than we thank you for your participation on the call this morning and certainlyif you have further questions, please feel free to call either Pam or myself atany point. Thanks very much. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation intoday’s conference. This concludes your presentation. You may now disconnect.Good day.

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