Northeast Utilities Q2 2008 Earnings Call Transcript

Aug. 4.08 | About: Eversource Energy (ES)

Northeast Utilities (NU) Q2 FY08 Earnings Call August 4, 2008 10:00 AM ET

Executives

Jeffrey R. Kotkin - VP of IR

Charles W. Shivery - Chairman, President and CEO

Leon J. Olivier - EVP and COO

David R. McHale - Sr. VP and CFO

Analysts

Anthony Crowdell - Jeffries

Ashar Khan - SAC Capital

Jonathan Arnold - Merrill Lynch

Maury May - Soleil Securities

Paul Patterson - Glenrock Associates

Steve Fleishman - Catapult Capital Management

Ted Durbin - Goldman Sachs

Operator

Welcome to the Northeast Utilities Second Quarter Earnings Conference Call. All participants will be in a listen-only mode until the formal question-and-answer session of the conference. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Your host for today's call is Mr. Jeffrey Kotkin, Vice President of Investor Relations. Mr. Kotkin, you may begin.

Jeffrey R. Kotkin - Vice President of Investor Relations

Thank you. Good morning and thank you for joining us. I'm Jeff Kotkin, NU's Vice President for Investor Relations. Speaking today will be Chuck Shivery, NU's Chairman, President and Chief Executive Officer; David McHale, NU's Senior Vice-President and Chief Financial Officer; and Lee Olivier, NU's Executive Vice President and Chief Operating Officer.

Chuck is joining us from the Annual Energy [ph] conference in California. Also with us today are Shirley Payne, our Vice President and Controller; and Jim Muntz, Head of our Transmission Segment.

Before we begin, I'd like to remind you that some of the statements made during this conference call may be forward-looking as defined within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risk and uncertainty, which may cause the actual results to differ materially from forecasts and projections.

Some of these factors are set forth in the press release issued Friday, announcing our earnings for the second quarter of 2008, as well as in the slides packet we have posted on our website to accompany this call. If you have not yet seen those slides, they are located in the Investor section of www.nu.com under presentations and webcast.

Additional information about the various factors that may cause actual results to differ can be found in our annual report on Form 10-K for the year ended December 31, 2007. Additionally, our explanation of how and why we use certain non-GAAP measures contained within both our news release and the slide packet and in our most recent 10-Q and 10-K.

Now I will turn over the call to Chuck.

Charles W. Shivery - Chairman, President and Chief Executive Officer

Jeff, thank you. Good morning and let me also thank you for joining us. We are pleased with the success we've achieved on behalf of both our customers and our shareholders during the first half of this year, particularly given the economic and energy cost environment in which we operate. In fact, as a result of these successes, we have raised our earnings guidance for 2008.

But before Lee and David provide you with details on our year-to-date results, I want to comment on recent public policy initiatives in New England as well as the advances in our own strategic initiatives.

As we discussed before, I firmly believe that this company will continue to succeed with an achieved result that benefit our customers, and are consistent with public policy directives of our political and regulatory leadership. Although New England faces many challenges, the environment in which we operate also provides many opportunities. Our success in building transmission is Southwest Connecticut is a [indiscernible] point. On July 29, ahead of schedule, we energized our solid core replacement cables beneath Long Island, completing a more reliable high voltage connection between Connecticut and Long Island that will also have better environmental profile.

In early 2009, we expect to place in service the last of our four major transmission projects that we began discussing publicly in 2001. These projects are making Southwest Connecticut's transmission system far more robust and reliable and have enabled grid operators to depend far less frequently on older, inefficient, more costly and less environmentally friendly plants to serve loads in a region that consumes half of Connecticut's electricity. These projects also have been the most significant factor in our improved financial performance in the recent years, creating a strong alignment between customers and investors.

We expect the largest and final Southwest Connecticut project Middletown to Norwalk to be complete in nine to 12 months ahead of schedule and at least 5% below its $1.05 billion budget. We believe our success with Middletown to Norwalk is indicative of one of our most important core competencies, the ability to site, source and build major transmission projects that can provide significant customer benefits.

Our New England East-West Solution or NEEWS projects will provide another opportunity to utilize these core competencies. Later this year, along with National Grid we will begin filing formal applications to construct a series of transmission lines to enhance the 345 KV interstate grid of Southern New England removing bottlenecks and vulnerabilities to our system and enhancing the flow of more competitive power.

These NEEWS projects will be every bit significant to our customers and to our investors as the Southwest Connecticut projects have been, and we will provide a preview of the siting and expected construction schedule shortly.

We're just consistent with our overriding strategy. In addition to its primary purpose of improving the region's reliability, NEEWS will provide a number of secondary benefits. As energy prices and the cost of construction continue to rise and as New England implements its regional greenhouse gas initiative and renewable portfolio standards, we need to find solutions that will allow our customers to use their energy more efficiently and to obtain more of that energy cost effectively from renewable and non-carbon emitting sources.

Down the road, NEEWS will help create the infrastructure that will allow us to access these more remote supply sources. In May, I discussed in some length our efforts to create a structure that would allow significant quantities of new renewable, non-carbon emitting power to move south from foreign wooden New England and Canada, to meet the energy requirements of all of New England.

We continue to meet with public policy makers and other utilities in both New England and Canada, to develop a framework to allow these initiatives to move forward. These conversations take two paths. One is to develop a consensus around the economic and environmental value of long-term power arrangements that can provide energy from renewable non-carbon emitting sources for 2 million consumers.

The other is to identify transmission routes over which we can import power to display high cost generation. We believe we are making progress on these initiatives and will continue to update you on that progress.

During this recently concluded legislative session, the New Hampshire Legislature passed Senate Bill 383, which establishes a commission charge for developing a plan to expand the electric transmission systems in Northern New Hampshire to encourage the construction of new renewable generation in the state. The commission must finalize its report by December 1 2008. We will work closely with New Hampshire officials to see the development of renewable resources as critical to today's state energy future.

Beyond transmission, policy makers in New England continue to create incentives to promote the development of renewable and distributive generation, and to better manage and reduce the use of energy. These incentives create new opportunities for and for companies involved in the energy business.

In New Hampshire, this spring, the legislature approved a bill that allows regulated utilities to invest in limited amounts of distributed generation on their system or on their customer's premises. In Connecticut, regulators have become more open to allowing the utilities to sign long-term contracts to meet the energy requirements of their customers.

Massachusetts probably took the most comprehensive step this year when Governor Patrick signed the Green Communities Act of 2007 on July 2nd. Among the bill's provisions were requirements at 80% of RGGI auction proceeds be earmarked for energy efficiency and demand response, the removal of the cap on utility expenditures for energy efficiency and demand response, the ability of utilities to sign long-term contracts for renewable resources, and the ability for utilities to be able to own and operate up to 50 megawatts of solar resource generation. Additionally, as David will discuss, Massachusetts regulators issued a decision last month that requires all utilities to move forward toward full decoupling.

Interestingly, 2008 is turning out to be not only year of strong operational and financial results for our company, it's also a year of change in how the public and policy makers are viewing utilities such as NU. As in many other parts of the country, customers are asking us not only to provide with them with safe and reliable energy delivery, they are asking us to provide solutions to their broader energy issues. We welcome the opportunities this change provides, we continue to share with you the progress we will make in this area.

Now let me turn the call over to Lee Olivier.

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Thank you, Chuck and good morning. So far 2008 has been a good year for NU's operation performance and the execution of our capital deployment plan.

I will start with operations. We are meeting our system line reliability goals, and we are on or ahead of schedules in all of our major infrastructure projects.

Our annual CapEx program of $1.3 billion is essentially on target, where transmissions pending being slightly ahead of schedule. However, distribution spending is slightly behind, primarily due to the slowing economy. We expect our distribution capital expenditures to the end of this year to be about $35 million below our budget.

Turning to generation; our base load coal and wood generation at PSNH was available 98% of the time, when prices in New England were the highest. And we expect to meet our generation capacity back to targets of the year.

In transmission, as Chuck mentioned we are now projecting completion of all four major Southwest Connecticut projects by the first quarter 2009, 9 to 12 months ahead of the original schedule of December 2009. We also project that together the four major projects will be less than our original estimated cost of $1.68 billion we have been discussing with you over the past several years.

Here is an overview of the status of those major projects. The Long Island cable replacement project into the service on July 29 and provides a much more reliable link between Norwalk-Connecticut and Northport, Long Island. This project was constructed jointly with Long Island Power Authority and our share of the cost to $72 million. The only remaining work on this project is to complete cable burial on the New York side of the Long Island Sound in September, which will require a brief outage. Of our remaining two Southwest Connecticut projects, the Glenbrook cables project between Norwalk and Stamford is now 93% complete and on budget of $223 million.

Most significantly, our Middletown-to-Norwalk project is now about 95% complete. We expect the 45 mile overhead section to be completed and in-service by the end of this year. Construction of the 24 mile underground section should be largely complete late this year; however, we expect testing to continue beyond the end of 2008.

As I mentioned previously, every month we shave off the in-service day, reduces capitalized cost by about $4 million. Assuming this project into service in early 2009, the cost will be at least $50 million below its $1.5 billion budget. Early completion will provide customers with the benefit of improved reliability and reduced market contingency cost almost one year earlier than we had initially projected, while at the same time trim the cost that will be needed to support... in support of the transmissions rates. For our investors, it means that cash flow is generated by the line before we reflect in our financial statements for nearly all of in 2009.

Southwest Connecticut has been a very big story, but it's not the only area of our service territory where we are enhancing our transmission system. There are dozens of other projects throughout our multi-stage service territory that together represent about $200 million or more of transmission spending annually.

In May, CL&P completed a comprehensive $47 million upgrade of the Barbour Hill transmission substation in South Windsor, Connecticut that serves a rapidly growing area Northeast of Hartford. We added new 345 kV feeds, installed necessary transformers and other substation equipment, and rebuilt the substation's 115 kV section in time for the peak summer load. Like Middletown [ph], Norwalk and dozens of other projects, this expanded substation is serving customers and earning a return for investors this summer.

Our last conference call took place just before we provided updated cost estimates for NEEWS. In Mid-May, we updated you on that project. The most significant change was a decision to merge the former Springfield underground cables project into an expanded Greater Springfield Reliability Project. The Greater Springfield Reliability Project is the largest and most complicated project within the NEEWS family of projects.

It involves building a new 40 mile, 345 kV line on existing 115 kV ride away from Ludlow, Massachusetts to Bloomfield of Connecticut. Along the way, we need to rebuild much of the 115 kV system in Massachusetts on the same right of way, construct two new switching stations and upgrade a number of substations. It represents a $714 million of the $1.49 billion we currently expect to spend on the NEEWS family of projects.

In late June, we began meeting with residents and other interested parties in three of the Connecticut towns potentially affected by the Greater Springfield Reliability Project and we began the same process two weeks ago in Massachusetts.

Next month, we expect to receive endorsements from the ISO-New England Reliability Committee for the Greater Springfield Reliability project and the other two 345 kV projects that comprise the bulk of NEEWS, with ISO-New England's formal approval by year's end.

One of the two others is the Interstate Reliability Project, which will be completed in coordination with a National Grid, CL&P section will connect from Lebanon, Connecticut to the Rhode Island border from which National Grid's section will extend from the Rhode Island border to Millbury, Massachusetts.

Third major project news is the Central Connecticut Reliability project, which will connect from Bloomfield, Connecticut to Watertown, Connecticut. We are proposing to build all projects overhead in within existing rights of way. This fall, we plan to file for siting approval of the Greater Springfield Reliability Project with both the Connecticut Siting Council and the Massachusetts Energies Facilities Siting Board.

Municipal consultations are expected to begin later this month in some of the 11 Connecticut towns in Northeast Connecticut affected by the Interstate Reliability Project with an eye on filing in late 2008 for siting council approval. We will seek siting council approval for the Central Connecticut Reliability Project next year. We expect to complete construction of the NEEWS projects by the end of the 2013, assuming that are siting applications are approved in a timely fashion, and we are not delayed by appeals.

We would expect to begin incurring major capital expenditures in late 2010 and for the peak construction period to be 2011 and 2012. I will remind you that our $1.49 billion estimate assumes that the projects are all built overhead and consistent with the configurations we will present to the siting authorities. If we are required to underground portions of the project, of course cost will rise considerably.

Turning to generation, I am sure you noticed that today we've updated our cost estimate for installing the clean air project, a wet scrubber for our PSNH Merrimack station in Bow, New Hampshire. We call the Merrimack as a dual unit 430 megawatt base load plant that provides some of the lowest cost power produced in New England.

The $457 million cost of the clean air project reflects current bids of the major project segments we received this year, and incorporates significant increases in a number of costs over the past several years, including increases in the cost of materials, labor and engineering. We expect to begin construction of the scrubber in 2009 and complete it well before the legislative deadline of July 1, 2013 for reducing the mercury emissions of Merrimack.

Recall that PSNH is 1,150 megawatts of generation operates under the traditional cost of service rate-based model. Since it's largely depreciated, and runs primarily on a combination of coal, wood and water; that generation portfolio is the primary reason PSNH's rates are significantly below than New England average.

The clean air project has a number of benefits. First, it will reduce the unit's sulfur omissions by more than 90% and mercury emissions by 85%. The project will also allow PSNH to award the purchase of 30,000 sulfur dioxide credits required to be purchased annually.

Second, it will maintain a valuable source of below market energy for PSNH and provide it with a valuable hedge against run up in capacity and energy prices. Once the clean air project is complete, our Merrimack station will be one of the cleanest coal-fired generating plants in America, and will continue to provide our customers with energy below the projected market price and lessen the region's dependency on natural gas.

I would also add that Merrimack previously installed a selective catalytic reduction system to reduce NOx and supplemental precipitators to minimize fine particulate matter. The clean air project not only will help the environment and New Hampshire's energy diversity, it represents a sound investment on behalf of our customers.

The 2006 legislation that requires us to install the scrubber also requires New Hampshire regulators to allow us to run our generation rate base return on equity that is currently 9.81%. We look forward to moving ahead with this project this year.

Now let me turn the call over to Dave McHale.

David R. McHale - Senior Vice President and Chief Financial Officer

Thank you, Lee and thank you everyone for joining us. There are two great positive items that I wanted to discuss this morning. First, financially, we had a very strong second quarter as well as a very strong second half of 2008. Second, because of those results and our confidence about the second half of the year, we raised consolidated earnings guidance for 2008 by $0.15 a share on the low end of the range and $0.05 a share on the high end, resulting in a new range of $1.80 to $1.95 a share that excludes the first quarter Con Ed related litigation charge. I will discuss the components of our revised guidance in a moment.

Turning to our financial results, as shown on slide 4 we earned $57.8 million or $0.37 a share in the second quarter of '08, up 19.2% from the $48.5 million we earned in the second quarter of 2007. In the first half of the year, as shown on slide 5, earnings excluding the first quarter after tax litigation charge of $29.8 million, were $146 million or $0.94, up 18.1% from the $123 million or $0.80 per share we earned last year.

The primary driver for the results was our transmission segment, where we earned in the second quarter 35.2 million, up 66.8% from the $21.1 million we earned last year. For the first half of the year, transmission earnings were at $67.7 million, up 83% from the $37 million we earned in the first six months of 2007.

The driver for the transmission earnings growth was the dramatically increased investment on facilities, particularly in Southwest Connecticut. Our transmission rate base including 50% of our capital expenditure today on the three newest lines in Southwest Connecticut totaled $1.77 billion at the end of June, compared with $1.18 billion a year earlier.

We also benefited in the first half of the year coming order on rehearing that FERC issued in March, on the return on equity levels authorized to New England transmissions owners. That order, which was retroacted to 2005 to generate $4 million of incremental transmission earnings in the first half of this year.

Last month, FERC approved a 100-basis point incentives for the equity returns on the entire Middletown-Norwalk project, and another 46 basis points for the underground portion. This means we will earn in equity return a 12.64% on the overhead section of Middletown-Norwalk and a 13.1% return on the underground portion. The 46 basis points added on the underground portion will result in about 1 million of additional earnings, once all the advanced technology plant is in service.

Also, I should note that within a few months we will be filing an application with FERC seeking incentives for our NEEWS projects. We expect to provide you with more detail on the application at the EUI financial conference in November.

During this past quarter, CL&P represented more than 80% of all NU's transmission earnings, since Connecticut has been the focus of over construction efforts in recent years. While that's not surprising given our heavy investment in Southwest Connecticut, we expect that ratio to change over the next several years as additional large projects are constructed in New Hampshire and Massachusetts. As these new projects are build, we continue to expect that our transmission segment will generate more than 50% of our consolidated net income by 2012.

Now turning to the distribution side of the business, our forward distribution segment earned $25.6 million in the second quarter of '08, up 9.4% from the same period of '07. In the first half of 2008, those segments earned $79.4 million, up 10.9% from the first half of last year.

In terms of the individual companies, the Connecticut Light and Power Company distribution segment earned $14.8 million in the second quarter of '08 and $33.7 million in the first half of '08, compared with earnings of $7 million in the second quarter of 2007 and $27.6 million in the first half of '07. Those improved results occurred despite a 5.8% year-to-year decline in the second quarter kilowatt hour sale and a 4% decline in the first half sale. The primary driver behind CL&P's improved performance were the $77.8 million annualized distribution rate increase that was effective February 1st '08. That has been partially offset by higher operating costs, some of which reflect enhanced maintenance programs approved in the rate case, as well as higher amortization expense.

CL&P's distribution regulatory ROE was 8.2% for the 12 month ended June 30 and we continue to expect the company to earn around 8% for 2008. PSNH's distribution and generation segment earned $10.1 million in the second quarter of 2008, down from $12.6 million in the same period of '07 and $21.6 million in the first half of '08, up from $20.7 million in the first half of 2007. PSNH benefited from distribution rate increases effective on July 1st '07 and January 1st of 2008, but those increases have been somewhat offset by higher operating cost and the absence of a one-time $2.7 million after tax benefit recorded in the second half of 2007 after PSNH's rate settlement was approved. That item reflected the recoupment of transmission expenses that had been expensed in 2006. PSNH's combined distribution and generation regulatory ROE was 8.8% over the 12 months ended June 30, 2008, and we expect to end the year around 9%.

Western Mass Electric earned $1.7 million in the second quarter of '08 and $6.5 million in the first half of the year, compared with $3.5 million in the second quarter of '07 and $9.4 million in the first half of '07. A $3 million distribution rate increase that was effective January 1st, 2008 was not enough to offset a number of items including a $2.9 million decline in year-to-date retail sale, a $1 million second quarter after tax charge on a regulatory decision concerning carrying charges on transition cost as well as storm expense and higher uncollectibles. The $1 million charge related to a recent DPU decision regarding the carrying cost and regulatory over recoveries that are eventually refunded to customers. The DPU ordered us to use a higher ROE in calculating the carrying cost going back to 2005, which in turn created a larger refund.

Western Mass' regulatory ROE for the 12 month ended June 30, 2008 was 8.2%, about 9% excluding the regulatory charge and we expect to end the year with a regulatory ROE of about 8%, or around 8.5% excluding the regulatory charge.

Yankee Gas lost $1 million in the second quarter of '08 and earned $17.6 million in the first half of 2008 compared with earnings of $300,000 in the second quarter of 2007, $13.9 million in the first half of 2007. Yankee's dramatic year-to-date improvement is due to our rate increase that was effective July 1, 2007 but that was more than offset in the second quarter by higher O&M and a negative outcome to a purchased gas docket that related to adjustments made several years ago to unbilled revenues, specifically the DPUC disallowed $5.8 million of the unbilled adjustments from the 2003 PGA year in order for Yankee to refund that $5.8 million to customers. This resulted in a $3.5 million after tax charge in the second quarter.

Including that charge, Yankee's regulatory ROE for the 12 months ended June 30, '08 was 9.1%, about 10% excluding the charge, and we expect to end the year around 8% again including that charge or around 9% excluding the regulatory charge.

In terms of sales, overall, our electric retail sales were down about 4.5% in the second quarter of '08 compared with 2007. On a weather adjusted basis, they were down 4.1%. For the first half of the year, as shown in slide 6, they were down 3.1% versus the same period of 2007 and down 2.6% on a weather adjusted basis. It's worth noting importantly that changes in our sales do not impact our bottom line nearly as much as they once did. In all three electric jurisdictions, the non-distribution revenues are tracked and reconciled to actual costs. So, sales variations impact our earnings only to the extent that we have over or under recoveries in accrued carrying costs.

With respect to distribution revenues, the majority of the approximately $0.03 per kilowatt hour distribution charge we had in each of our state is recovered to fixed rate charges, such as the monthly customer and demand charge. For CL&P, this reflects the fact that in their last rate case, the DPUC began implementation of rate decoupling via increased fixed cost recovery and rate design and will continue to enhance fixed costs recovery in future rate cases consistent with state legislative policy. Based on today's rate, CL&P recovers nearly 65% of this revenue through non-usage components. You will find that it's a similar number for Western Mass Electric, about 60% for PSNH and about 55% for Yankee if the DPUC adopt our latest rate design proposal.

In our view, declines in sales reflect much of the same economic influences that are being experienced throughout the region and nationally. While there are pockets of the economy that exhibit steady results or even growth, it's fair to say that the direct and indirect impacts of increases in energy cost generally outweigh the positive indicators at this time. Businesses and consumers are responding to the increasing cost in various ways, including installing distributive generations, utilizing our conservation and load management programs, and taking steps on their own to both conserve on their usage of electricity and reduce the usage in peak hours.

With respect to sales by customer class, the biggest decline is in industrial sales, which are down 8.7% this year. For a number of years, we have been experiencing a declined industrial sale and expect to see the trend continue. We believe the bulk of the sales decline so far this year is due to two things. The first one being customer reaction to rising prices, not only of electricity but also oil, natural gas, gasoline and other consumer goods. The second reason for the decline is an increase in large customer owned co-generation and distributed generation.

The distributed generation in Connecticut Public Act 05-01 authorizes CL&P to recover all loss distribution revenue associated with qualifying projects. This is accomplished via the federally mandated congestion charges as approved by the DPUC. It's also worth noting that for CL&P, 99% of industrial revenue was collected through non-energy charges. That figure is 90% less amount for electric, and about two-thirds with PSNH.

Residential sales were down 3.5% or 2.6% on a weather normalized basis for the first six months of 2008. Feedback from our customers indicate they are proactively taking steps to reduce their usage and respond to the high cost of electricity, concerns about the economy, and their own financial situation and for environmental reason. At the same time, we continue to see growth from the prior year in number of residential customers which helps to offset some of the decline in the average use per residential customer.

On commercial sales, they were also down for the first six months of this year, 0.6% on an actual bases and 0.12% weather normalized. Some of this decline is attributable to certain generators who previously took station service from CL&P as retail commercial customers, but this year are served directly by ISO New England as wholesale customers. These station service customers are interconnected to transmission voltage and contribute no distribution revenue for the loss of station service retail load has no earnings impact.

Unlike our electric sales, Yankee Gas firm sales posted an increase in the second quarter, up 2.4% on a natural basis and up 7.4% on a weather adjusted basis. On the actual basis, all of that increase came in the industrial sector where sales were up 10.6% in the quarter and 5.2% year-to-date. Approximately half of the industrial growth is due to the addition of customer owned gas-fired distributive generation. We believe the highly favorable pricing comparison today of natural gas versus heating oil is contributing to industrial growth as well.

Now let me turn to the collection of our customer receivable. Consistent with our sales result over the first six months of the year, our uncollectible expense is also being influenced by the economy. Consistent with trends over the last two to three years, our write-off as a percent of revenues have increased this year for all of our distribution companies; most notably at Western Mass Electric. As a result, our uncollectible expense in the second quarter was somewhat greater than we expected and our projected expense for the year is somewhat higher as well.

WMECO sales, it's important to note that changes to our uncollectible expense do not impact our bottom line on a dollar-to-dollar basis. For example, a portion of the uncollectible expense for each of the electric distribution companies is allocated to the respective energy supply rate and recovered as a track expense. For CL&P and Yankee Gas, bad debt attributable to their hardship customers are tracked and recovered on a dollar-to-dollar basis as authorized by statute. PSNH and Western Mass offer discounts to limited income customers and these amounts are recovered.

Nonetheless, the recent increase in our uncollectible expense is real and is one of the factors along with sale, capital investment and O&M expenses that we continue to watch closely as we consider the timing and magnitude of our next distribution rate case. We do not expect any rate filings in 2008. And although we continue to evaluate our rate case strategy at this time based on earnings, cost and sales trends, it's probable you'll see rate cases filed by CL&P and PSNH in mid year, probably mid year 2009. We are hopeful that the Yankee Gas can avoid a rate case filling until beyond 2009. It is also probable Western Mass Electric will file in 2009.

On July 16th, the Massachusetts DPU ordered all utilities in the state to file for full decoupling of unit sales from distribution revenues in their next rate case. Currently, we are in the second year of a two-year settlement approved by regulators at the end of '06. That settlement allowed us to raise distribution rates by $1 million in 2007 and another $3 million this year, and also allowed us to create tracking network for certain costs including pensions and post retirement medical benefit.

More specifically with regard to the recent ruling, the DPU will honor existing settlement but want all utilities to go through a contested case by 2012, and all utilities to notify DPU by September 2nd, 2008 when they expect to file that rate case. Therefore, Western Mass will not settle its next case. So in accordance with this order, we will submit our rate case to the department and proceed with a fall evidentiary hearing process, in addition to decoupling, which will be based on fixed amount of revenue by customers, by class. The filing can include aspects of performance-based rate making to include inflation and capital spending, if warranted, and may include cost tracking mechanisms if the company can demonstrate that such costs are large, vital and out of their control. The ruling also allows for recovery of loss base revenues as result of incremental congregation and load management spending.

Now from rate making, let me turn to financing. In the second quarter, we completed a vast majority of the external financings we expect to undertaking in 2008. CL&P sold $300 million of ten-year first mortgage bonds, and NU sold $250 million of five-year senior notes. For CL&P [ph], the coupon on both series was 5.65%. Also PSNH sold $110 million of ten year first mortgage bonds of 6%. We're encouraged to see a number of new investors buy significant shares of those issuances, and think that bodes well for our debt issuances in future years.

Two other financing is on the calendar for this year, including a $100 million private placement first mortgage bond at Yankee Gas. Connecticut regulators approved Yankee's issuance request last week. You may have noticed that also last week Moody's raised its outlook on Yankee Gas to stable from negative, primarily based on last year's rate settlement. We think that bodes well for Yankee's upcoming debt issuance. At time all credit ratings on the NU system are stable.

Additionally CL&P has a $62 million tax exempt first mortgage bond that has a fixed interest rate for a five-year period that ends October 1. We are currently assessing our options for remarketing that cash exempt bond.

At the end of June, total debt represented about 58% of NU's consolidated total capitalization. You may recall that we've said that when total dept approaches 60% we'll begin to look at the timing of an accreditation.

We expect to reach 60% by the end of 2008. So we continue to expect that issue equity within the next year to maintain our balance sheet position, to ensure successful future financing which is related to our capital investment program. Dealing with the issuance of their new equity, we expect our investments to be accretive to EPS and position us for attractive long-term earnings growth.

Cash flows from operations totaled $217 million in the first half of '08, approximately $165 million after repayment of rate reduction bonds. We continue to project cash flows of between $450 million and $500 million after rate reduction bond payment.

Improvement in the second half will come from a number of factors including the fact that we paid $49.5 million in the first quarter to settle litigation with Con Ed and with a rise of about $19 million of tax benefit from that payment in the second half of this year. Additionally, net regulatory refunds and under recoveries totaled $136 million in the first half of this year and we expect that they are going to be much smaller in the second half.

Now before turning this call back to Jeff to start Q&A, I want to discuss our announcement on Friday evening in which we raised 2008 guidance. Slide 7 contains the details, but I will start with transmission. Earlier, I noted the positive impact of recent FERC decisions on our 2008 transmission earnings, we also benefited from strong execution of our capital program that Lee mentioned. As a result of these factors, we raised 2008 EPS guidance from $0.75 to $0.85 per share to between $0.85 and $0.90 per share. We also reviewed our parent and other affiliated guidance in light of the successful NU unsecured debt financing in June, and all-in rates lower than we what had imputed into our guidance.

Because of that factor and lower shorter term debt interest expense and lower O&M expenses, we amended our guidance to a loss of $0.10 per share excluding the $0.19 litigation settlement charge. That has been the previous projected loss of $0.10 to $0.15 per share. At the competitive businesses, we have earned $0.03 per share so far this year and continue to be successful managing our wholesale energy position, so we are raising our estimate this year from breakeven to between breakeven and $0.05 per share.

Finally, the recent Yankee Gas and Western Mass regulatory stations and lower than projected sales in the first half of 2008 will have some impact on our distribution business. As a result, we'll lower the upper end of our distribution and generation earnings range to $1.10 per share from $1.15 per share, but we are maintaining the lower end at $1.05 per share. When we add up all these three changes, we are now projecting '08 earnings between $1.80 and $1.95 per share excluding the first quarter litigation charge.

As we have done in the past, we expect to provide you with 2009 earnings guidance and 2009 to 2013 capital expenditure in rate-based projection including the New Hampshire clean air project at the EEI conference in November.

And lastly, just as a reminder, our third quarter dividend will increase 6.25%, a $0.05 per share increase in the annualized rate from $0.80 to $0.85 per share. This is the seventh consecutive year we've raised annualized rate by $0.05 per share.

Thank you very much for your time and now I'll turn the call back to Jeff.

Jeffrey R. Kotkin - Vice President of Investor Relations

And I am going to turn the call back to Christine, who can tell you how to enter your questions. Christine?

Question And Answer

Operator

Thank you, sir. [Operator Instructions].

Jeffrey R. Kotkin - Vice President of Investor Relations

Thank you. Our first question today is from Anthony Crowdell from Jeffries. Anthony?

Anthony Crowdell - Jeffries

Good morning. Just wanted to know if you could talk a little about the blended ROE in your transmission business and what do you guys see as the blended ROE when you look at all the projects together at the end of '08 and also at the end of '09?

David R. McHale - Senior Vice President and Chief Financial Officer

Anthony, this is David. Let me try and just address that. I think in the past, we've talked about 12%, moving up to 12.1%, maybe a little higher over the life of our five-year numbers that we shared with you. I think we've gotten at least one kind of constructive regulatory order, maybe a couple since that time including that 50 basis point adder for our technology associated with MN. I don't think it's enough to move that number dramatically at this point, so we'd see still in that 12%, 12.1%, 12.2% and that's subject to the intensive filing that will take place later this year at for our NEEWS project. So we'll kind of keep that number in place for the time being, we'll update you on EEI. Any update will be driven around our views on the NEEWS incentives.

Anthony Crowdell - Jeffries

Great. Thank you.

David R. McHale - Senior Vice President and Chief Financial Officer

Alright.

Jeffrey R. Kotkin - Vice President of Investor Relations

Next question is from Ashar Khan from SAC. Ashar?

Ashar Khan - SAC Capital

Hi, good morning. Dave, just going back, could you just tell us, what the transmission CapEx is going to end up in '08 and what it is going to be in '09. Based on the comments in... I guess you said you are running faster. I am trying to understand how CapEx is shifting around in this current or next year?

David R. McHale - Senior Vice President and Chief Financial Officer

Sure. Let me have Leon kind of tackle that for you.

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Yes. If we look at... Ashar, if we look at '08, we'll spend about $700 million in '08, and in '09 about $350 million in '09.

Ashar Khan - SAC Capital

$350 million that's total?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Totalin transmission.

Ashar Khan - SAC Capital

Okay. I had it down as 506 in a previous slide. So it's going to be lowered now by 150?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Ashar, I think when you say 506, you are referring to the projection that we gave at EEI in November of 2007, when we had the earlier schedule for MN, is that correct?

Ashar Khan - SAC Capital

That's probably correct. Okay. That's what I have, and probably that is correct. Okay, that's been amended of course?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Yes that's correct and at EEI we'll give you a new schedule of that 2013.

Ashar Khan - SAC Capital

2013. Okay. Thank you.

Jeffrey R. Kotkin - Vice President of Investor Relations

Thanks a lot. Next question is from Jonathan Arnold from Merrill Lynch. Jonathan?

Jonathan Arnold - Merrill Lynch

Good morning.

Jeffrey R. Kotkin - Vice President of Investor Relations

Good morning

Jonathan Arnold - Merrill Lynch

Just following up on the discussion on sales that David just made, wondering if you could be a little more specific about what... how much in the first half is slower than expected sales of had to your impacted earnings. Say, realize this several ways and which that you've shielded. And secondly, what of all kind of assumptions around sales we made for the second half in the distribution guidance, were you changing it too much. And the earnings impact of that assumption?

David R. McHale - Senior Vice President and Chief Financial Officer

Got it, let me kind of tackle that second piece only because with respect to your first question. We really don't have that level of specificity that we'd kind of share in that detail around our disclosures, necessarily. But let me kind of tell you about what our thoughts are for going into guidance. And obviously, we kind of lower the top piece of that guidance from 115 to 110, driven on our use of sales. And even though I think there is a certain elasticity to sales, I hope you'll gather from our rate making mechanism that we all detect it from a revenue recovery. That said, right now, we see that when you weather normalize CL&P's to sales and think about what's going on, going forward we probably continue to see that type of performance that is going to underperforming what we had originally thought going into the year in that sort of same timeframe. So, I think weather normalize were down about 3.5% this year, we would expect to see that trend going forward.

I think one of the things that we sort of studied just from a behavioral standpoint is weather later this summer or this month as consumers experienced really warm weather, weather that really turndown their air conditioning when its gets hotter a number of consecutive days, we've done some recent polling of our residential customers and one thing that they tell us is, they are being more proactive in watching their thermostats more closely on those one day and on cool days. So, we'll see if that persists. But I think in the guidance, we see this type of sales experience going forward.

I think we see this... similar is of at PSNH, not a lot of strength in, their sales environment is better. It's about flat on a weather normalized basis. As there is some erosion further erosion going forward we continue to be concerned about our Western Mass jurisdiction, primarily because from an economic standpoint and from an operating standpoint they are the weaker of our customer base, and I think their response may be a little bit more negative going forward, and we do all see some firming at Yankee Gas. So, the weak spots, Massachusetts, I think you can expect similar trends for CL&P and PSNH that we are seeing so far.

Jonathan Arnold - Merrill Lynch

Thank you.

Jeffrey R. Kotkin - Vice President of Investor Relations

Alright. Next question is from Maury May. Maury?

Maury May - Soleil Securities

Yes, good morning folks. Congratulations on a good quarter.

Jeffrey R. Kotkin - Vice President of Investor Relations

Thank you.

Maury May - Soleil Securities

Question on the Massachusetts energy regulation that was just signed by the governor last month. I am unclear as to the utility recovery of the possible cost of 50 million... I am sorry 50 megawatts for state, is it going to be rate based, is it going to be owned and leased, how are utilities going to recover there?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Maury, this is Lee Olivier. The legislation really leads it up to each utility to be able to basically file a plan on how much photovoltaic it will take that would want to build and what is the recovery mechanism. So, it's not determined whether that goes into essentially distribution rate base or you create a separate rate base with a different return on equity associated with it. So that's something that we are looking at now.

Maury May - Soleil Securities

Okay. And that 50 megawatt for the state so what would WMECO's share of that be, I guess it would be a small share?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

That's actually 50 megawatts per utility.

Maury May - Soleil Securities

Oh, really okay.

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Yes, so each utility could build up to 50 megawatts.

Maury May - Soleil Securities

Okay. And what's your best estimate for a kilowatt of solar these days, $5,000 still a good number?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

It's around $6,000 is the last number that I saw without any other subsidies from directly from some other source.

Maury May - Soleil Securities

Okay, okay good. And how would this be instituted? Would customers' request solar on their roofs and would the utility then install it and maintain it and essentially put it into the entire rate base?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Yes, we are putting together a plan that addresses that. But essentially, customers could request it.

Maury May - Soleil Securities

Okay.

Leon J. Olivier - Executive Vice President and Chief Operating Officer

And a customer will get a kind of a lease fee for allowing us to install solar on their facility. We could install solar on our own facilities as an example and connect it to the grid. So, there are a number of ways to do that.

Maury May - Soleil Securities

Would it possibly be socialized upon the entire rate base?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Across the state?

Maury May - Soleil Securities

Well, across the... let's say the service territory of each utility?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

It would be socialized across the service territory of each utility.

Maury May - Soleil Securities

Okay, great. Thank you, Lee.

Leon J. Olivier - Executive Vice President and Chief Operating Officer

You're welcome.

Jeffrey R. Kotkin - Vice President of Investor Relations

Thank you, Maury. Next question is from Paul Patterson from Glenrock. Paul?

Paul Patterson - Glenrock Associates

Hi guys.

Jeffrey R. Kotkin - Vice President of Investor Relations

Hi Paul.

Paul Patterson - Glenrock Associates

Just a little bit more on the rate case expectations in 2009. What kind of ROE I mean I guess in the middle of 2009, your expectation is that your ROEs will be at that point an appropriate point to go in and get relief, is that... I mean could you give us a little bit of a flavor for the range in ROE that you think that might, just generally speaking obviously nothing like specific, but just in general what will happen to the ROE in 2009?

David R. McHale - Senior Vice President and Chief Financial Officer

Well, I think right now if our strategy stays the course here and we are filing in 2009 and I mentioned that we are hopeful that the Yankee may not be in the harbor quite yet, but for the electric companies that puts 2008 as the test year and if you look at a test year in and which you heard me rattle off the ROEs, you're kind of a mid-8 in some cases depending on how utilities adjust for the numbers, and there is no further rate relief for 2009, although in some cases like CL&P we've got a rate increase coming at February 1, you've got continued pressure on these returns. That's the bad news.

So you're going to go into these cases with a test year that's weak and then a filing year in which it is... the trends are getting increasingly negative and I think that's the backdrop by which you have this dialog. As well as for CL&P in particular; still very, very meaningful capital expenditures going forward. We know that commission has been supportive of our reinvestments in the aging infrastructure, so all the dialog around the type of investments, the degree of investment, how much maintenance CapEx you want to do on this system. That too is the backdrop for our cases going forward.

Paul Patterson - Glenrock Associates

With Connecticut Light & Power, I got the ROEs that you guys are generally sort of expecting for PSNH and WMECO. What is for Connecticut Light & Power, sorry, I just got distracted, momentarily?

David R. McHale - Senior Vice President and Chief Financial Officer

For the Light & Power company?

Paul Patterson - Glenrock Associates

Yes.

David R. McHale - Senior Vice President and Chief Financial Officer

In 2008, we said we'll be in the about 8% range. We haven't given any specificity yet for 2009, haven't given our earnings guidance around 2009. That's something we'll talk about a little bit later in the year.

Paul Patterson - Glenrock Associates

And it said, it's going to be 2008. I guess the question still comes up why not going in a little bit earlier? I mean because it's going to take sometime to get through the process of what have you or you follow me as opposed to wait until the middle of 2009?

David R. McHale - Senior Vice President and Chief Financial Officer

Yes I do follow you. And I think that's something that we're studying pretty carefully, given this sort of climate that we're in. But it's definitely not out of the question, Paul.

Paul Patterson - Glenrock Associates

Okay. And then the equity issuance, I didn't get the size of that, that you were sort of expecting to do against near the end of 2008?

David R. McHale - Senior Vice President and Chief Financial Officer

In today's remarks, I didn't mention the size. In the past, we've talked about it given the projections around rate base, CapEx and the like, given our leverage range of 60%. We probably have to issue about $0.5 billion over the next five years. And we said in the past, half of that could come in 2009; maybe half a couple of years later. That too for the subject to update when we consolidate kind of our new strategic view later this fall, but those numbers aren't out of the question by any means. If you had $250 million in your models for 2009, I think you're going to be in a lot of company with where I think the street is right now.

Paul Patterson - Glenrock Associates

Okay, no change. Okay then, just finally on the distributed generation side there, which was I guess one of the big drivers for the lower industrial usage. Where you see the demand is, is pretty much the low hanging fruit in that area sort of already taken by the industrial customers or did you see... where do you see the trend in that going, I guess it's mostly Connecticut with the law there, is that correct?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Yes, Paul it is, and mostly in Connecticut. Although as Chuck intimated, there is the opportunity for more distributed generation in New Hampshire, with the recent legislation, the distribution company can build up to 6% of its peak demand load and that would be over 150 and 120 megawatts for instance with PSNH in New Hampshire. So we expect more distributed generation in New Hampshire, we expect that we will be proud of that and build that, there is heavy emphasize on that legislation in renewable. So it could be photovoltaic in New Hampshire because it's a very good area for a wind part.

In terms of Connecticut, there are still some more opportunity there, probably the biggest one recently was the Kimberly-Clark facility that went commercial in terms of their distributed generation this year, fairly large load. A lot of the other major places like UTC are already on essentially in-house generation. But there is a number of other smaller application for high-rise buildings and industrial parts that still remain inside of the state.

Paul Patterson - Glenrock Associates

Any perspective of how this with a load management program, the conservation that you are seeing, there is also I guess the peaking generation that I guess is... I forgot... I apologize if I missed this, where that's going in the DPUC. What that might do with the demand supply balance in the wholesale market?

Leon J. Olivier - Executive Vice President and Chief Operating Officer

Well, I think what's the... all of our studies and the RRP that is put together by us not eliminating and is now currently being reviewed by the Connecticut Energy Advisory Board, basically tells you that there is no more need for additional base load generation. So if you factor in the RRP that the DPUC put out a couple of years ago, which was for about 800 megawatts and this other one which is for around 600 megawatts of peaking generation, and if you factor in no retirements of existing plans, Connecticut has a lot of older plans, 40 years older, so that really essentially don't run. So most of the revenues are created through the forward capacity market, you don't need base load; you won't need any more peaking plants, and commit a lot of current years, what happens to those existing plans that are old, and sit idle for the most part.

Of course the other part of it is when NEEWS is built, NEEWS brings in additional transfer of capacity into the state, it would adds another 1200 to 1300 megawatts of transfer capacity to bring power in from places like New Hampshire and Massachusetts. So build out of base load generation in the long-term will probably not be strong inside of Connecticut.

Paul Patterson - Glenrock Associates

Thanks a lot.

Jeffrey R. Kotkin - Vice President of Investor Relations

Alright, thank you Paul. Our next question is from Steve Fleishman from Catapult. Steve?

Steve Fleishman - Catapult Capital Management

Yes. Hi gentlemen.

Jeffrey R. Kotkin - Vice President of Investor Relations

Steve?

Steve Fleishman - Catapult Capital Management

Hi, there. Couple of quick questions, first on the transmission guidance change, could you maybe give some sense how much of the change is related to the higher ROE versus essentially the higher rate base and completion of the spend earlier than expected?

David R. McHale - Senior Vice President and Chief Financial Officer

Steve, this is Dave. I think clearly most of the change in that guidance is driven by the FERC ROE decision that retroactively kind of reached back and gave us more value from past year as well as more value in 2008. So that was probably $0.03 of it, you sort of think about it that way. The accelerated spending this year and the success of having bring projects nearer to completion along with the number of other items, smaller items is the balance of it.

Steve Fleishman - Catapult Capital Management

Okay. That was $0.03 out of $0.10, so it's probably more the higher spend this year?

David R. McHale - Senior Vice President and Chief Financial Officer

It is really what we are doing around Middletown-Norwalk, putting that in position to come into service very early in 2009.

Steve Fleishman - Catapult Capital Management

Okay. My question is just, I know Chuck at the beginning mentioned a little bit about the NEEWS project and the initiatives with Canada, Northern New England and just do you think by the end of this year or maybe by your EEI meetings we will have better definition on your potential opportunities there, and maybe even some of kind of contract arrangement?

Charles W. Shivery - Chairman, President and Chief Executive Officer

Steve, this is Chuck. I would hope that while we get to that point in time in the year, let's say November EEI, we've gotten some more definition around what might be possible and can have a more wholesome discussion around that, so that's a pretty good timeframe.

Steve Fleishman - Catapult Capital Management

Okay, thank you.

Jeffrey R. Kotkin - Vice President of Investor Relations

Alright, thank you Steve. Our next question is from Ted Durbin from Goldman Sachs. Ted?

Ted Durbin - Goldman Sachs

Hi, all my questions have been asked, thanks.

Jeffrey R. Kotkin - Vice President of Investor Relations

Alright, very good. Well, we don't have any more questions; if you have any more you want a follow up, please give us the call later this morning or this afternoon. Just want to thank everybody for joining us. Thank you and have a good day.

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