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Executives

Phil Lembo - Assistant Treasurer

Jim Judge - Chief Financial Officer

Analysts

Peter Hark – Talon Capital

Jonathan Arnold – Merrill Lynch

[Ted Dursin] – Goldman Sachs

Bill Apacelli – Citigroup

NSTAR (NST) F1Q08 Earnings Call May 1, 2008 9:00 AM ET

Operator

(Operator Instructions) Welcome to the First Quarter 2008 NSTAR Earnings Conference Call. I would now like to turn the presentation over Mr. Phil Lembo, Assistant Treasurer.

Phil Lembo

Welcome to NSTAR’s Conference Call to discuss our reported results for the first quarter of 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. These statements are based on our current expectations, estimates or projections and are not guarantees of our 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, future events or otherwise. You are advised, however, to consult any further disclosures we make on these topics in reports to the Securities and Exchange Commission.

That concludes my opening comments and now I’d like to turn the call over to Jim Judge.

Jim Judge

Yesterday we reported our first quarter 2008 results. Reported earnings per share for the first quarter were $0.55 compared to $0.45 for the same period last year an increase of $0.10 per share. There were certain key factors that had an influence on our strong first quarter earnings performance. First, an increase in transmission revenues provided $0.04. About $0.02 of this reflects the continued investment in the transmission business while the remaining $0.02 relates primarily to a cumulative adjustment we recorded to reflect the positive outcome of an order issued by Ferc on March 24 of this year.

You might remember that the New England Transmission Owners filed the request for re-hearing involving the calculation of the base ROE that was part of an order issued in October of 2006. The March order is a result of that request. The order allows transmission owners in the region to increase their base return on equity rate by 24 basis points.

Cumulative adjustment covers the period from February 1, 2005 through year end 2007. As such, I’d characterize a retroactive adjustment as non-recurring. Going forward the Ferc order results in an 11.64% base return on equity and allows an additional 100 basis point add for new transmission investments.

A second factor that had a positive impact on the quarter was a $0.04 pick up from our non-utility operations. This is primarily the result of higher sales, better operating performance and a good job controlling costs. About $0.01 of this total resulted from the absence this year of a customer billing refund related to a pricing dispute that we booked last year.

A third factor that contributed to the $0.10 increase in earnings for the quarter was a $0.04 pick up as a result of higher electric distribution revenues. The two components of this increase are one, revenues related to the performance based rate adjustment that was implemented on January 1, 2008. This adjustment is based upon the average change in the GVP price index of 3.23% less a 55 basis point offset.

You’ve heard me say this before but I’d like to remind you that our customers see no increase in the in stock delivery rate because any increase in distribution rates is offset with an equal reduction in the transition charge. The second component of the increase was a 1.2% increase in electric sales for the quarter. Unlike some areas of the country here in the Boston area there have been some positive economic developments with regard to indicators such as office vacancy rates which decreased to 10.8% from 12.4% on a year to year basis.

The current rate is the lowest level in seven years. Meanwhile on a national level the trend has been different, office vacancy rates have increased to 13.2% from 12.8%. Also in the Boston area the unemployment rate dropped to 4.7% from 4.9% year to year while the national unemployment rate has worsened going from 4.5% up to 5.1% on a year to year basis.

Factors that had a negative impact on the quarter include the 3.2% decline in gas sales which reduced earnings by $0.01 and resulted from milder weather conditions this year compared to last year as heating degree days declined by about 4%. Higher depreciation expense also reduced earnings by $0.01 as we continue to invest in our electric and gas system infrastructure.

This calls out the discussion of the drivers for the quarter I should note that O&M costs were essentially flat resulting in no net impact on the first quarter. As you can see we’re off to a very solid start in 2008 right now we are maintaining our EPS guidance range of $2.16 to $2.26. I’m hopeful that the positive trends of Q1 can continue throughout the remainder of the year however it is still very early. The third quarter is always a pivotal quarter and we did have a pretty warm weather in the third quarter last year.

At this point I’d like to provide you with an update on a couple of regulatory legislative items that have been outstanding for quite some time now. First, on February 29th the Mass DPU issued an order on our offer of settlement between NSTAR and the State’s Attorney General that was filed last July related to our initial energy mitigation filing.

As you probably know the DPU rejected the settlement and a procedural schedule was subsequently established to conclude the proceeding. The DPU’s rejection of the settlement does not result in a rejection of the incentive request. In response to the schedule we and other interested parties filed an issue briefs with the DPU on April 18th and plan to file reply briefs later today.

Two other related issues that I’ve discussed with you before involved the pending energy legislation being addressed by the Mass House of Representatives and Senate and the decoupling preceding presently before the DPU. First the legislation related to a new energy bill that’s been proposed. During late 2007 and January 2008 the Mass House of Representatives incented and drafted and approved two separate energy policy reform bills. These bills addressed energy procurement, renewable and alternative energy generation and other green power initiatives in utility regulation.

Both bills are currently under review by a joint House and Senate conference committee. The committee is expected to combine the two bills into one comprehensive energy policy reform bill for ultimate approval. We expect the resulting bill will be enacted to law during 2008. I cannot anticipate or predict what the terms of the final bill will include and therefore cannot predict the timing or potential impact of the legislation. I can promise you that we will continue to provide input into the development of the final legislation regarding this new energy bill.

The second issue, the decoupling proceeding was opened in June 2007. That generic proceeding was open to consider whether a base revenue adjustment mechanism that decouples the utilities retail distribution revenues in its sales volumes should be implemented in Massachusetts. Comment period for this proceeding ended in late ’07. I would expect that the DPU will issue its policies and guiding principles regarding the decoupling sometime over the next several months. Given the timing any impact from decoupling won’t likely be seen until 2009 at the earliest.

Before I conclude my remarks I’d like to talk about a couple of issues that are likely on the minds of many of you, the local economy and cost inflation. First let me start with the economy. As I stated in my earlier comments greater Boston economy looks to be performing well.

Question-and-Answer Session

Operator

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

Peter Hark – Talon Capital

We lost your presentation just as you were talking about the Boston economy and didn’t hear anything post that. Should we go and redo that again or not. Maybe the people on the webcast were still involved but I’m guessing the people on the line didn’t hear that part of the presentation.

Jim Judge

You heard me cover the decoupling?

Peter Hark – Talon Capital

Yes.

Jim Judge

I’ll pick it up again and just to wrap up we did have a technical issue. A couple of issues that may on the minds of many of you, the local economy and cost inflation. Starting with the economy, as I stated in the earlier comments greater Boston economy looks to be performing well versus other part of the country. Just a few days ago the Commerce Department reported that the State’s economy grew at a 3.2% annual rate. That’s about five times faster than the 0.6% national rate. Also Massachusetts employers added jobs while companies nationwide cut more than 200,000 jobs.

Space technology, biotechnology and health service industries have helped Massachusetts withstand the economic pressures being felt nationally. In addition, our customer mix, as many of you know provides a bit of an economic hedge. Our commercial customer base is made up of many government, health care facilities, colleges and universities, its industrial customers that tend to be more sensitive to economic conditions and fortunately these days we have a very small industrial customer base less than 10% of our sales.

The second issue, cost inflation I’d like to point out that we have had a very good track record of controlling our O&M costs as many of you know. For example, as far back as 2003 our O&M costs totaled $444 million and in 2007 our O&M costs amounted to $447 million essentially a flat comparison. We will continue to evaluate all of our expenses to ensure that we keep these costs under control as we move through 2008 and beyond.

In addition, as you know we do have an annual PBR adjustment that’s tied to the change in the GDP price index that provides some hedge against the impact of inflation but again remember still we are able to keep our total delivery rates flat to our customers. That concludes the formal remarks now I’d like to open it up for questions you may have.

Peter Hark – Talon Capital

Could you break out the $0.55 by business segment and then I think in your opening comments on transmission the plus $0.04 did you say that $0.02 of that was non-recurring and please explain again why?

Jim Judge

The $0.02 is non-recurring on transmission because it’s a catch up. We had a positive order and ROE order that came out of Ferc in March and the order is basically retroactive to February of 2005 so we get to apply that higher return on equity going back to that period of time so it’s about a $4 million pickup for us in the quarter which is $0.02.

Peter Hark – Talon Capital

The business segment breakout of the $0.55.

Jim Judge

We generally don’t break it out into business segments. We’re electric, gas and non utility pieces but as a rule we don’t report on a quarterly basis.

Peter Hark – Talon Capital

You mentioned that you’re going to file reply briefs today in the mitigation incentive award proceedings. What effectively are you trying to demonstrate to the DPU and then after today what is the schedule?

Jim Judge

After today the schedule is really in the hands of the DPU. We would expect that they would take a couple months to deliberate, hope for an order in the summer, June or July but there isn’t sort of a clock ticking on this one. I think the process began about 18 months ago now. What we’re trying to do is the history here is that we did save customers we believe $130 million, our customers and the incentive allows us a piece of that savings.

The department rejected the settlement with the AG on a basis that the savings estimate was speculative. It certainly was based on a forecast of cost savings but a lot of what the department rules on is based on forecast such as when they approve a merger it’s based on forecasted savings. When they approve an IPP or another buyout it’s based upon forecasted cost and savings. Even on demand sight management programs, efficiency programs are based on forecasts.

We tried to point out that we didn’t think the issue of speculative nature of the estimate was an issue to deny the incentive. We have filed a brief that commented that, the attorney general and another party that filed a brief as well and the filed briefs go in today. No date certain on the decision but we would like to think that it will be a second quarter event.

Operator

Your next question comes from Jonathan Arnold – Merrill Lynch.

Jonathan Arnold – Merrill Lynch

The $0.04 pickup you had at non-utility operations in the quarter I think you said $0.01 of that was from absence of billing settlement gain from last year so you probably saw that coming. To what extent were the other $0.03 part of your outlook and to what extent were they upside performance?

Jim Judge

The other $0.03 was frankly a pleasant surprise. It’s a combination of factors, we’ve done a nice job in terms of control of costs, and they had very high operating performance of the units. They experienced lower fuel costs in ’08 than in 2007. They actually had some higher sales; they produced electricity steam and chilled water. When you look at the sales performance it was a good quarter as well. I would expect the remainder of 2008 to be more in line with 2007. I don’t think we see this pick up as something we’re going to see every quarter; I just think they had an excellent quarter on many fronts.

Jonathan Arnold – Merrill Lynch

There isn’t seasonality to that business is there of a material nature?

Jim Judge

Given the nature of the products, the multi products that they sell it is less seasonal than say our electric business which is summer peaking. They have earnings contribution every quarter.

Jonathan Arnold – Merrill Lynch

Why wouldn’t they just keep doing a better job?

Jim Judge

I think if you have 100% availability out of the units I don’t know that you’re going to be able to continue that every single quarter.

Jonathan Arnold – Merrill Lynch

On this mitigation incentive you mentioned the AG and the other parties to the settlement I don’t recall did they file supporting the settlement or did they shift their position at all in the briefs after the rejection?

Jim Judge

There were three briefs filed inside the AG and then a union brief, the IBEW filed a short brief as well. That was the only comments submitted.

Jonathan Arnold – Merrill Lynch

Those comments were in support of proving the settlement or something along the lines of the settlement?

Jim Judge

The settlement was rejected so I think the AG’s brief essentially says if you want to give them zero for an incentive there’s a way to get to that number or if you want to have the company recalculate their number based upon a different set of assumptions you should ask the company to do that. The company and the AG were disappointed that the settlement was rejected; we thought it was a fair resolution of all issues that have been raised. Nevertheless we are where we are right now.

Jonathan Arnold – Merrill Lynch

You mentioned the issue of it being based on perspective assumptions is this an issue where you would ever really know the number or were some of the other things you sighted you ultimately would see it or is it that there’s always effectively speculative?

Jim Judge

The second case that we anticipated filing is certainly less speculative number because we can point to an $80 million refund that came from the generating facility owner that our customers have now gotten in rates over the last 12 months. There’s a very specific settled amount it would appear to me to be filed as speculative.

Jonathan Arnold – Merrill Lynch

When do you anticipate filing that?

Jim Judge

As we’ve said in the past we want to get through one complete cycle in terms of this is a new mechanism in the state so we’d like to get through one complete case before we pancake a second one.

Operator

Your next question comes from [Ted Dursin] – Goldman Sachs.

[Ted Dursin] – Goldman Sachs

A couple questions on transmission. Where are you in terms of the phase two 345 how far are you in terms of completing that? Any changes to that project based on the Ferc order? Second question is just thinking more broadly about transmission needs in the ISO and how you’re positioned in terms of bringing in renewal power and things like that?

Jim Judge

The first one, we’re right on schedule. Phase two is about $60 million of spend this year and we’re actually splicing cable as we speak. The station work that’s involved with phase two is going on as well. Right on schedule, no issues there. We are earning was 12.4 now 12.64% on the first phase and would expect that to be on the second phase as well.

In terms of the prospects of taping clean energy in Northern New England or Canada we’re watching that closely, involved in that to the extent that there are five different projects that are proposed and I think a lot of them have a lot of merit when you look at the ability for renewable power, wind, the landmasses that exist up state.

You’ve got hydro in Canada that’s excess capacity so it’s a great opportunity to bring the power into the region especially with these ambitious renewable performance standards that we have in each of the states. There are five projects there that have a lot of merit, we think. I don’t think they’ll end up seeing all of them but one thing I would note about all five is that they land in our service territory. They either come into Boston or into our canal unit on the Cape.

We’ll be involved to various degrees with the projects that come forward. We have to obviously to be reinforcements in our own franchise area to accommodate the line. Very early on as you know. I think the ISO been working through this issue through the remainder of this year and then you obviously got permanent construction; I think we’re talking about a five year process. We like the prospects of bringing in cheap renewable power. We like the transmission upgrades that are involved here and we will be involved in some form or fashion.

[Ted Dursin] – Goldman Sachs

On the phase two I think the way the Ferc order is written you have to have everything complete by the end of this year. Do you think you’re on track for that or even if it spills into next year would you still think you’d get that extra 100 basis point? On the broader ISO question, would you all be putting significant capital at work or would this be more partnering and letting others take the lead on the construction side and you dealing more with doing the connections on your substations, things like that?

Jim Judge

We haven’t made a decision in terms of any of that yet but all of it is a possibility. We certainly will have some transmission investment in each of thee projects, order magnitude the estimates are $2 billion a piece it’s a chance that would end up partnering with somebody in terms of building out the project but at a minimum we’ve got some investment in our own infrastructure to accept the new line coming into our service territory. No decision made yet but certainly we are encouraged and optimistic about the potential.

[Ted Dursin] – Goldman Sachs

On the phase two being complete by the end of the year?

Jim Judge

Some of what we’re doing right now may be close to plant by the end of the year. We certainly anticipate earning the higher return on that portion of it. The ’09 piece we will be filing for similar treatment for the ’09 spend but I don’t know, we certainly haven’t done that yet.

Operator

Your next question comes from Bill Apacelli – Citigroup.

Bill Apacelli – Citigroup

On the PBR adjustment that took place the beginning of the year, how much was that?

Jim Judge

The percentage was 2.68% and amounts to be on an annual basis about $21 or $22 million.

Bill Apacelli – Citigroup

To clarify, because the settlement was rejected you had reduced the amount of your take on any savings, I think the original agreement was a 75% of savings back to customers and 25% to you guys and I think that when you announced that proposed settlement that amount had been cut in half. Since the settlement has been rejected depending on what happens with this filing then again when you file the second time you would look to actually recapture under the original terms correct? Or, that remains to be seen?

Jim Judge

You’re correct in that the settlement being rejected means that that term had to be renegotiated with the attorney generals office no long applies. The original formula is still the formula in the settlement 25%.

Operator

At this time there are no other questions in queue. I’d like to turn the call over to Jim Judge for closing remarks.

Jim Judge

Thank you all for your attention today. I hope you have a good weekend. A number of you I think we’ll see at AGA early next week. Phil and I will both be attending the AGA Forum we hope to see you there. Thank you.

Operator

Thank you all for your participation in today conference. This concludes the presentation you may now disconnect and have good day.

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Source: NSTAR Q1 2008 Earnings Call Transcript
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