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NSTAR (NYSE:NST)

Q4 2007 Earnings Call

January 25, 2007 9:00 am ET

Executives

Philip Lembo - Assistant Treasurer

Jim Judge - Senior Vice President, Treasurer and Chief Financial Officer

Analysts

Annie Tsao - Bernstein

Alex Kania - Merrill Lynch

Bill Apacelli - Citi Investment Research

Ted Durbin - Goldman Sachs

Mike Weinstein - Zimmer Lucas

Paul Patterson - Glenrock Associates

Operator

Welcome to the Fourth Quarter 2007 NSTAR Earnings Conference Call. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Philip Lembo, Assistant Treasurer. Please proceed.

Philip Lembo - Assistant Treasurer

Good morning, everybody, and welcome to our conference call to discuss the reported results for the fourth quarter and full year 2007, as well as to discuss our outlook for 2008.

Before we get started with Jim Judge, NSTAR's Chief Financial Officer, let me say that this conference call contains some forward-looking statements that involve risks and uncertainties, and these statements are based on our current expectations and estimates and projections of management, and they are not guarantees of future performance.

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

This concludes my opening remarks. And now, I would like to turn the call over to Jim Judge.

Jim Judge - Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Phil. Let me also welcome everybody.

Yesterday, we reported our fourth quarter and yearend 2007 results. Reported earnings per share for the fourth quarter were $0.37 compared to $0.38 for the same period last year. That's a decrease of 2.6%.

For the quarter, there were several factors that had an influence on the $0.01 decline. First, higher distribution revenues, primarily driven by higher electric and gas sales, contributed $0.11 to the quarter. Electric sales increased 4%, gas sales were up 21%, primarily due to colder weather conditions. Heating degree days for the quarter increased about 17% in our service area as compared to last year. Overall, heating degree days for the quarter were about 4% below normal.

Second, there was a $0.02 contribution from our transmission business. Net transmission rate base in the fourth quarter of '07 was about $70 million higher than in 2006. These positive impacts were fully offset by increases in O&M costs, depreciation expense and property taxes. The O&M increase cost of $0.06 was driven primarily by higher labor costs and higher bad debt expense in the quarter. In addition to these items, cost associated with our safety and reliability programs added a negative impact of $0.03 in the quarter.

Continuing with the impacts for the quarter, an increase in depreciation expense and higher property taxes reduced earnings for the quarter by $0.03. Finally, we realized a lower contribution from our non-utility operations, as we expected, that amounted to about $0.02.

Now, I'd like to briefly cover the full year 2007. Reported earnings per share for the year ended December 31, 2007 were $2.07 compared to $1.93 for the same period last year. Overall, I'd characterize 2007 as another very good year for our customers and in line with our guidance and overall expectations.

From an operations perspective, our service to customers was outstanding. Based on specific service quality criteria, NSTAR's reliability was once again the best of Massachusetts utilities in 2007 and in the top quartile of our industry peers.

We focus all our efforts on keeping the lights on and gas flowing for our customers, and when outages do occur, restoring service safely and quickly. Our outage restoration time is also a first quartile performance in the industry. So, NSTAR customers are experiencing fewer outages and they are waiting less time for service to be restored when there is an outage.

Also, with the help of technology investments, we're answering calls faster, and customers have more web-based options available than ever before. Although there is always more work to be done when it comes to customer service, it is clear from our very strong operating performance in 2007 that we are on the right track.

In addition to very positive operating performance, we were able to achieve earnings growth of 7.3% for the year, as our and electric and gas sales rebounded as a result of more normal weather conditions. Electric sales were up 1.8% for the year, while gas sales increased 12.7%.

Heating degree days in our service area were up about 11% for the year, while cooling degree days increased by about 13%. Heating degree days for the year were just about normal, down 0.5%, while cooling degree days for the year were about 17% better than normal.

The increase in electric and gas sales, combined with the rate provisions of our seven-year rate plan, resulted in a pickup of $0.33 for the year. About half of this increase was due to rate adjustments implemented during the year.

It's important to remind everyone that customers saw no increase in the delivery portion of their bill where we implement the new rates, because any increase in distribution rates is offset with an equal reduction in the transition charge. Our customers' delivery rates will remain flat for the seven years of the rate settlement.

In addition, higher contributions from our transmission business boosted earnings by $0.08 as we continue to make investments in this part of our business. These positive factors were offset somewhat by an expected increase in O&M expense. A higher level of O&M reduced earnings by about $0.12 for the year. This is driven by a higher level of labor related costs as a result of increased staffing levels and wage and benefit increases and a higher level of bad debt expenses.

An additional item that had a negative impact on us was the $0.03 that I talked about earlier associated with spending on our safety and reliability programs. In addition, an increase in depreciation expense for the year cost us $0.06 and reflects the significant investment that we continue to make in our electric and gas system infrastructure. Finally, as we expected, decline in the contribution from our non-utility operations reduced current earnings by $0.06.

Now, I'd like to turn your attention to 2008. In terms of general guidance for 2008, we expect earnings to be in the $2.16 to the $2.26 range for the year. There are a few important assumptions underlying these earnings outlook that we should discuss. First, our sales growth estimate assumes normal weather conditions throughout the year. Our expectation is that our electric sales will grow 1% to 2% in 2008. In addition, the annual performance-based rate adjustment is 2.68%, and was implemented as of January 1, 2008.

We should also expect to invest an additional $140 million in our transmission system infrastructure, which represents significant progress on Phase Two of the 345kV project, which will add a third and final line to the project, and is expected to be in service in 2009, some transmission efficiency programs and other routine transmission projects.

On a negative side, we believe that O&M costs will likely increase at a modest rate of 1% to 2% in 2008 when compared to the 2007 level, primarily reflecting labor-related cost increases. Also we're expecting an increase in our rate plan deferral for the year, as we continue to keep our delivery rates to customers flat throughout the settlement period. Lastly, both depreciation and property tax expense will likely increase in 2008 due to our continued investment in our infrastructure.

As you can appreciate, there are many moving parts to an outlook, ours is no different. Having said that, we are very comfortable with our guidance and optimistic for another very good year in 2008.

To conclude my remarks, I'd like to provide you with a brief update on a couple of regulatory issues that are currently pending here in Massachusetts. First is the draft legislation related to a new energy bill that has been proposed during late 2007 in January of this year. The Mass House of Representatives and Senate drafted two separate energy policy reform bills. These bills address energy procurement, renewable and alternative energy generation, and other green power initiatives and utility regulation.

Both bills are currently under review by a joint House and Senate Conference Committee. Committee is expected to evolve one comprehensive energy policy reform bill for ultimate approval by the Governor. It is anticipated that the legislation will be enacted during 2008. I cannot anticipate or predict what terms or the timing of the final bill.

I can promise you that we will continue to provide input into the development of the final legislation regarding this new energy bill, and we are confident in the capabilities of the reasonable experienced legislative leadership overseeing this process.

At the DPU, there are few regulatory issues pending. One is our energy mitigation incentive related to the $134 million that we helped save customers. An order in that decision is expected February 29 for a revised DPU schedule.

The second issue is the decoupling proceeding that was opened last June, which I have discussed with you in previous calls this year. All I can say, right now, is that the decoupling debate is still in the early stages, as DPU is deliberating on the comments received. And when it is approved, it's unlikely to have any material impact until 2009 at the earliest.

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

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Annie Tsao from Bernstein. Please proceed.

Annie Tsao

Good morning.

Jim Judge

Hi.

Annie Tsao

Can you hear me?

Jim Judge

Yes, Annie.

Annie Tsao

Yeah, hi. How are you?

Jim Judge

Fine. How are you?

Annie Tsao

I guess several questions. First is like you mentioned in the beginning you have a higher bad debt. So, can you just elaborate that in a little bit more detail, how is your bad debt situation? And also in your 2008 outlook, your assumption for the electric sales is assuming to increase 1% to 2%. How about the gas sales there? And also my last question has to do with whatever happened right now with the subprime crisis, do you see any impact to any of your business?

Jim Judge

Okay. The bad debts, obviously, sort of the national economy, we're no different up here. We do have housing issues impact in the economy. We're fortunate to have such a large commercial base. I think, in particular, we do have some pretty good growth going on with the hospitals and educational facilities.

But the bad debt number in the fourth quarter was higher. I think our days receivable outstanding inched up about a day over where we were a year ago. Not unexpected given sort of the economic pressures that the customers were experiencing. And we are doing as good a job as we can in terms of collecting receivables, but I think it's understandable given the economic situation in general.

Your second question, both electric and gas sales are expected to be 1% to 2% in '08 in terms of growth. And the third question had to do with subprime?

Annie Tsao

Subprime.

Philip Lembo

Yeah. Subprime impact. Right, Annie?

Annie Tsao

Yeah.

Jim Judge

We're not really seeing any significant increases or impacts to the company's result of the economic turmoil that that's generated.

Annie Tsao

Thank you.

Operator

Your next question comes from the line of the Alex Kania with Merrill Lynch. Please proceed.

Alex Kania

Good morning.

Jim Judge

Hi, Alex.

Alex Kania

A couple of real quick questions. The first one is, when you were given the drivers for the quarter, I wanted to make sure that the $0.03 of reliability and safety spending is that in addition to the $0.06 of increase to O&M?

Jim Judge

It is, yes.

Alex Kania

Okay.

Jim Judge

This is the first proceeding through the DPU 2006 and 2007. We basically look at the incremental costs associated with the three programs that are funded through that mechanism. And that incremental definition is really what got us to recognize that some of the costs weren't going to be recovered or shouldn't be recovered. So, it's a onetime adjustment that occurred in the fourth quarter.

Alex Kania

Got it. Okay, thanks. And when I'm looking at the 2008 guidance, is there some contemplation of increased benefit from, let's say, kind of the next market mitigation filing that you would do presumably once you get the order out of the one that's currently in front of the DPU?

Jim Judge

We have not made an assumption about the second energy mitigation filing, although we are poised to file it as soon as we get the first filing, which, again, we're hoping for February 20-29. It will take us some time to sort of review that filing, I would think, at the DPU. And at this stage, we're not assuming an increase in that incentive.

Alex Kania

Okay, great. Last question is just philosophically about decoupling. As you're looking at the interaction of economy and sales growth over the past year or so, do you sense that there is kind of a really pressing need for that right now or are you seeing it as more kind of a long-term thing as, let's say, the Governor's energy efficiency initiatives, whatever form they take, to become more effective?

Jim Judge

I don't think there is necessarily a pressing need, certainly from the utilities perspective. I mean we've looked back at our sales growth over the years. And I think, if you look back, the 10-year average growth for NSTAR was about 2%, if you look back at the 20-year number, it was 2%, and the 30-year number was 2%. And the numbers that we just disclosed here for 2007, electric sales were up 1.8%.

So, again, it seems to be 2% is the baseline, no pressing need from our perspective for decoupling. But obviously, we are supportive of the Governor's green initiatives and proposals and the needs for more energy efficiency. And we do think that the philosophy of the decoupled rates provides the rate model going forward to make sure that those initiatives are pursued. So, it's more of a longer term solution.

DPU is very busy with the full agenda, including a generic docket that they had on decoupling. I do expect more discussion in decoupling to take a place in '08, but it may not have an impact in terms of our rate design until late in the year or maybe even '09.

Alex Kania

Great. Thanks very much.

Jim Judge

You're welcome.

Operator

Your next question comes from the line of Bill Apacelli from Citi Investment Research. Please proceed.

Bill Apacelli

Hi. Good morning.

Jim Judge

Hi, Bill.

Bill Apacelli

Just to clarify, most of my questions have been asked and answered, but on the bad debt expense that Andy brought up regarding the O&M outlook for next year, do you assume any additional bad debt expense above what it was in '07 or is it just kind of flat or has it returned more to a normal level?

Jim Judge

The assumption in '08 in our operating plan is essentially fairly flat with the levels that we experienced in '07.

Bill Apacelli

Okay. Thank you.

Operator

Your nest question comes from the line of Ted Durbin with Goldman Sachs. Please proceed.

Ted Durbin

Hey, guys. A question for you on your transmission CapEx. Is all of that transmission going to be FERC regulated, what kind of ROEs are you expecting to get on that, and when do you expect cash recovery of the spending?

Jim Judge

I mean all the transmission investments are FERC related. We earn a return on new transmission investment at 12.4%, and we began to, sort of, charge into rates as it's in construction work-in-progress. So, there isn't significant regulatory lag associated with any of the project spends in transmission.

Ted Durbin

Okay. So the full $140 millions should be FERC regulated?

Jim Judge

Its FERC related. At least, while the construction is going on, we earn on 50% of it as it's equipped. And they when it's closed the plants, it earns a full return. But it's all FERC related, correct.

Ted Durbin

Okay. And this is all part of the Phase Two projects, there is no new projects that are coming through there?

Jim Judge

No. Off the $140 million only about $60 million is related to Phase Two of the 345kV. We do have transmission efficiency programs that we're planning down the Cape Cod. So it sort of illuminate some of the congestion that's there, which is about another $40 million, and then there's roughly another $30 million of other routine transmission projects that we do.

So, you could say nearly half of that is associated with the 345, but there is another half associated with a series of other infrastructure equipment upgrades on our transmission system.

Ted Durbin

And you've got sort of permits and whatnot that you need from any local jurisdictions for all this work?

Jim Judge

Yeah. I don't think permits are an issue.

Ted Durbin

Okay. And then, just last question for you on the regulatory ROE. Do you know what you'll be filing with the state for the different electric companies?

Jim Judge

I don't at this stage. It's very early in the year.

Ted Durbin

Okay, great. That's all my questions. Thanks.

Operator

Your next question comes from the line Mike Weinstein with Zimmer Lucas. Please proceed.

Mike Weinstein

Hi. Could you quantify the amount of the impact of the bad debt in the fourth quarter in EPS?

Jim Judge

They have been rounded to about $0.02 in earnings.

Mike Weinstein

Okay. And also, what is the amount of energy mitigation payments that you're assuming in your '08 guidance?

Jim Judge

We continue to bill at the current level. We have the request before the department at $6.3 million over three years. So, it's $6.3 million that we're assuming in '08.

Mike Weinstein

$6.3 million in '08 or one-fourth of that?

Jim Judge

$6.3 in '08.

Mike Weinstein

Okay.

Jim Judge

It's basically $19 million over three years.

Mike Weinstein

Got it. Okay and thank you.

Operator

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

Paul Patterson

Good morning. Can you hear me?

Jim Judge

Hi, Paul. Sure.

Paul Patterson

I'm sorry, if I missed this. What was the weather impact for 2007?

Jim Judge

For 2007, in terms of comparison to '06 or comparison to normal, which --

Paul Patterson

I'm sorry, comparison to normal.

Jim Judge

Comparison to normal, for the full year, heating degree days were almost perfectly flat with normal. I guess we're down 0.5%, which is very small. Heating degree days, we're down 0.5% essentially, flat with normal. Cooling degree days, we're up 11%.

Paul Patterson

Okay. And then, I was just wondering if you could give an outlook to the floor capacity market, what you guys are seeing, the auction happening a little bit of time, what have you guys thought about that?

Jim Judge

Well, I think the generator is currently going through a qualification process. The sense we get is that there's a sizable interest, a sizable queue, and I'm sure that they will be screened. I think the process calls for a bid in February of '08. From our perspective, it's really difficult to assess what the pricing will be, and actually, how much capacity will be available. But from our perspective whatever the outcome is, as you know, Paul, all costs are fully recoverable from customers.

Paul Patterson

Sure. I was just wondering if you guys had sort of some of market intelligence on that, but that’s cool. Okay. Thanks a lot.

Jim Judge

You're welcome.

Operator

There are no other questions in the queue at this time. I would like to turn the call back over to Mr. Jim Judge for closing remarks.

Jim Judge

Well, that concludes our yearend call. Very pleased with the very effective job we've done for our customers in '07, and our shareholders also had a good year as well. And we certainly hope for more of the same in 2008. Thank you all for your participation in today's call.

Operator

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

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