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Central Vermont Public Service (NYSE:CV)

Q1 2008 Earnings Call

May 12, 2008 10:00 am ET

Executives

Ann Warrell - Investor Relations Specialist

Robert H. Young – President and Chief Executive Officer

Pamela Keefe – Vice President, Chief Financial Officer, and Treasurer

Dale Rocheleau – General Counsel

Analysts

Peter Hark - Talon Capital

Operator

Welcome to the first quarter 2008 Central Vermont Public Service earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today, Ann Warrell, Investor Relations Specialist.

Ann Warrell

Welcome everyone to the CVPS 2008 first quarter earnings teleconference. As Sharon said, my name is Ann Warrell, and I’m the investor relations specialist here at CV. Before we begin, I would like to point out to you that we may be discussing certain subjects related to our first quarter earnings that may contain forward-looking statements.

I would caution you that actual results could differ materially from those expressed in such forward-looking statements, and I refer you to our safe harbor language that is contained in the First Quarter Earnings Press Release that we issued Friday. This release appears on the Investor Relations section of our web site at www.cvps.com along with the slides that will be referred to throughout today’s call.

Also during the call today, we will be discussing earnings per share, which in all instances refers to diluted shares of common stock. Leading today’s discussion are CVPS’ President and Chief Executive Officer Bob Young, and Vice President, Chief Financial Officer, and Treasurer Pam Keefe. Bob will begin with an overview of the company’s earnings and an update on corporate and strategic development. Pam will then describe the first quarter financial results in detail. We will leave time to answer your questions at the conclusion of the call.

Now, I’d like to turn things over to Bob.

Bob Young

On Friday, we reported 2008 first quarter earnings of $5.9 million or $0.59 per share of common stock. This compares to 2007 first quarter earnings of $5.7 million, or $0.55 per share. Pam will discuss our financial performance in detail shortly, so I would like to take a few minutes now to discuss our strategic plans and developments which begin on Slide 2.

As I’ve stated many times in the past, our primary focus is to ensure CVPS maintains high-quality customer service and reliability. We continue to provide superior reliability as measured by our 17 serve standards which are monitored monthly by the Public Service Board and the Department of Public Service. In 2007, we met all of the service standards exceeding most of them by 10% or more.

However, to maintain our exceptional record, we need to make substantial capital investments and system infrastructure in the coming years. In 2008, our planned capital spending is $41 million, which includes $19 million for generation, transmission, and distribution; $11 million for Southern Loop, and $3 million for our new enterprise resource planning system among other items.

Although our capital spending will vary from year to year, it will range from $30 million to $50 million for the next several years as we begin installation of an advanced meter infrastructure system often known as AMI and ramp up electric system improvements. In addition, we plan to make further equity investment in VELCO, Vermont’s transmission operator within the next several years. These continued investments support and enhance long-term system reliability and help stabilize rates.

This year, we do not expect to make a substantial VELCO investment. Based on current information from VELCO, we could invest up to $2 million this year. The schedule for future quantities and timing is unclear, but we will keep you apprised of that information as it become available. As you can see, our capital strategy is designed to serve customers well and consistently build rate base which in turn will increase shareholder value.

Turning to Slide 3, our capital investment plan also helps further our related goal of continuing to improve our financial position and restoring an investment grade credit rating. We’ve made meaningful progress toward this end already this year. In January, the Vermont Public Service Board approved the rate case settlement that we reached with the Department of Public Service last year. This decision increased rates 2.3% or $6.4 million annually beginning February 1. Even with the increase, our new rates remain the lowest of any major utility in New England.

Part of our strategy to strengthen our financial position also involved adoption of the alternative regulation proposal we filed last August with the Public Service Board. We expect the board to rule on the case in the third quarter, but we are working with the Department of Public Service to come to an agreement.

The alternative regulation plan would contain quarterly power cost adjustments and an annual base rate adjustment as well as an annual earnings sharing mechanism. If an agreement is reached and approved by the board, it would obviate the need for a traditional rate case filing.

At the same time, we are working with the Department of Public Service on a business process review which we agreed to conduct as part of last year’s rate case settlement. The review is being conducted by an independent consultant and will help ensure that CV’s critical business functions are operating as efficiently as possible. The business process review is currently underway and will likely conclude by the end of the third quarter. We will update you on its notable findings and resulting action plans later this year.

Our long-term strategy also includes collaboration with the state and other stakeholders to build a vibrant electric future for Vermont. The actions we take now will ensure that over the long term electricity remains as affordable and reliable as possible for our customers.

As you can see on Slide 4, we are making good progress on this front as negotiations continue with Hydro Quebec and Entergy for future long-term contracts. We expect to work out a proposal by the end of this year with Hydro Quebec, though I cannot discuss possible terms at this point in time due to confidentiality agreements that are in place. We hope to have a contract proposal with Entergy as well.

As you may recall, Entergy is seeking to relicense the plant beyond its current 2012 license expiration. Reaching a favorable agreement with the Vermont utilities will help position Entergy for relicensing approval by the Vermont legislature and the Public Service Board.

We also think a law establishing protocols for a state review of the plant to be completed during the same period will help bolster confidence in the operations of Vermont Yankee. Meanwhile, a separate bill that might have jeopardized Vermont Yankee’s position in the corporate restructuring of its parent, Entergy, was vetoed by the governor last week, and legislators opted to not attempt a veto override. Outside of Vermont Yankee and Hydro Quebec, CVPS is also investigating other domestic and Canadian contract opportunities in order to assure a diverse power portfolio in the future.

We are also actively analyzing the possibility of building new generation in Vermont. Last year, a group of Vermont utilities including CVPS hired a consultant to study the feasibility of new in-state generation. The first phase of this study considered cost estimates and the economics of construction. The second phase is looking at infrastructure, fuel, transmission, and permission, and should shine more light on what could realistically be built given all of the factors involved. The result should be available in the next couple of weeks.

Moving to Slide 5, we are incorporating the results of the Department of Public Service’s statewide public engagement process in our future supply plans. The results show generally that Vermonters say they want more renewable in the mix and are willing to pay more for them. Today, CVPS has one of the cleanest power portfolios of any utility in the nation.

Our environmental commitment extends beyond our signature programs such as CVPS Cow Power and CVPS Plug and Go to developing combined heat and power projects as part of our Southern Loop non-transmission alternatives. We’re even involved in a couple of solar projects in our service territory. All of power planning efforts are focused on the goal of replacing our current power supply with a stable competitively priced green portfolio. We are making solid progress toward achieving this goal, and I look forward to sharing developments and milestones with you in the coming months.

At this point, I would like to turn the presentation over to Pam, who will discuss our financial results in depth.

Pam Keefe

For an overview of the first quarter earnings, please refer to Slide 6. This quarter, retail sales decreased slightly due to the loss of two industrial customers from plant closures and a slight reduction in residential sales. Offsetting this decrease were a $3.9 million in resale sales which is attributable to more power available for resale at higher market prices and $700,000 increase in other operating income resulting from the sale of transmission rights. Overall, operating revenue increased $4.5 million compared to the first quarter of 2007.

On the expense side, purchased power expenses increased $600,000 due to increased output from independent power producers and increased purchases of Vermont Yankee plant output at higher rates. This increase was partially offset by decreased short-term purchases and decreased deliveries from Hydro Quebec. More significantly, other operating expenses increased by $4.5 million.

We incurred $2.2 million more in transmission costs from VELCO for new projects they are putting into service and overall expansion in New England. The remaining $2.3 million increase resulted from higher storm costs, employee-related costs, and professional service fees. The combined results of these items was a modest increase in utility operating income of $400,000 over the same period in 2007. Meanwhile, there was a increase of $2.5 million in equity and earnings of affiliates as a result of our $53 million investment in VELCO in December 2007.

Overall, net income increased $200,000 in the first quarter of 2008. This result translated to earnings of $0.56 per share, up $0.01 per share. For a more detailed analysis of the company’s first quarter financial performance, please refer to our earnings release which was issued on Friday.

Looking at Slide 7, the company’s cash position was $6.3 million on March 31, 2008, which is in line with our expectations. As we have discussed previously, we recognize that cash on hand, cash flow from operations and our $25 million credit facility will not be sufficient to fund our capital-spending plan of approximately $41 million in 2008.

We are planning to issue $60 million in first mortgage bonds later this month. The bonds will be used primarily to pay off the $53 million bridge financing for our 2007 investment in VELCO. The remainder will be used to help fund the capital projects that Bob described earlier. We are also considering additional financing options, and I will provide you with more details about those plans later this year.

At this point in the year, we are reaffirming our earnings guidance range of $1.50 to $1.60 per share for 2008 that we issued in February. So far, the variability in various cost and revenue drivers is within the range that we expected. As a reminder, our allowed ROE is capped at 10.71% until our next rate proceeding or the approval of an alternative regulation plan, and with that I’d like to turn the call back over to Bob.

Bob Young

With the first quarter complete, we are making good progress on achieving milestones that support our long-term strategy which is shown on Slide 8. As I discussed with your earlier, we are implementing an accelerated capital plan to address our aging infrastructure. This will ensure that we continue to meet our service quality standards and provide superior reliability for customers over the long term. We are improving our financial strength and working to achieve milestones necessary to restore an investment grade credit rating, and finally, we are actively collaborating on plans to create affordable, reliable, and environmentally responsible electric future for Vermont.

Thank you for joining us today. I look forward to updating you on your remaining calls this year and to seeing many of you at our upcoming analysts’ luncheon in New York on May 22, 2008. If you have any questions about attending that event, please feel free to contact our investor relations consultant at John Tolo at 480-657-0710.

At this point, Pam and I would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Peter Hark - Talon Capital.

Peter Hark - Talon Capital

Can you give us an update on the status of the ARP proceedings, and then secondly remind us how you will recover increasing transmission costs, and then lastly we were hoping to get maybe some news on a new contract with Entergy for Vermont Yankee and I was wondering when we might get, I think, what you called Bob the prima facie evidence to go forward in Vermont?

Dale Rocheleau

The status of the alternative regulation plan is that the Department of Public Service and the other parties in the case are required to file their testimony and position in the case on May 23, 2008, as the next step, and the hearings are scheduled for mid-July.

Peter Hark - Talon Capital

Then after hearings, how long will they deliberate before coming out with a final order?

Dale Rocheleau

We are expecting it sometime during the third quarter of this year.

Pamela Keefe

As far as transmission costs go, the forecast for transmission cost for this year is certainly within the range that we had expected. Going forward, under alternative regulation, we would have a more timely recovery to the extent that transmission costs vary from those built into rates.

Peter Hark - Talon Capital

Can you be more explicit, Pam? Do you have to make a filing to demonstrate on an annual basis what transmission costs have done and then get recovery on a forward basis or is there some opportunity for some retroactive recovery of these costs?

Pamela Keefe

Well, the way alternative regulation would work is that we would do a base rate filing, which is like a regular rate case filing where we forecast what we think our transmission costs are going to be, and then let’s say that for the rate year they are much higher than we had planned, we do have rate adjustment mechanisms so that on an annual basis, we’d be able to book an entry that should true us up and then that would be reflected in rates on a forward-looking basis, so from a cash perspective, there would be a bit of a lag, but from an earnings perspective, not so much.

Peter Hark - Talon Capital

Can you say what forecasted transmission expenses will be for ‘08 and what the actual were for ’07?

Bob Young

I cannot be terribly specific about Entergy at this point in time due to the confidentiality agreements. We have been negotiating with them now for two or three months. We are making progress with them, and I think that both parties still at this point in time feel that having something done third quarter or so of this year, so that whatever we complete can go into their relicensing docket in front of the Public Service Board, which is due to start hearings, I think, early in the third quarter of this year is a very important milestone for us.

Pamela Keefe

And as far as transmission question, transmission by others in 2007 was $16,524,000, and for 2008, it is forecasted to be $20,200,000.

Operator

You have no further questions.

Bob Young

Thank you very much and again if you have further questions that come to mind today or in the future, please don’t hesitate to call either Pam or myself or Ann Warrell. We thank you very much for your participation, and I look forward to seeing most of you at our meeting in New York in just a week or so. Have a very good morning and we look forward to seeing you soon. Thank you.

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