Eversource Energy
Q3 2007 Earnings Call Transcript

Published: 5 Nov 2007

[Chuck Shivery:]

Thank you and good morning and thank you all of you for coming this morning. This is a really pretty nice morning for us. I guess probably the more important thing that we did not put on your tables is that the New York Patriots won last night, coming from behind and that makes me very, very happy. We started the day off, I think, pretty well. I want to talk just a little bit about some of the things that have happened so far and then I'm going to do something a little different this morning. I want to spend a little bit of time looking out, and actually looking out beyond what is in the current five year numbers and begin to talk about some of the trends that all of you are very familiar with, but that are hitting not only the industry, but are hitting in a particular way and what those challenges might mean for opportunities for NU. David and Lee will then spend the rest of the time going through all of the financial and all the operational things and we think it's a pretty comprehensive package. I also would like to thank those of you that filled out an online survey that we did just a few months ago. We appreciate your input, and in fact, some of you will see that some of the new information in the news release and some of the information in this presentation is a direct result of the input that you guys provided us. So I thank you for that. Along that line, as we move through the year, to the extent there is information that we can provide that we now do not; or information that we do provide that we could provide it in a different way if you would please give Jeff Kotkin a call and let him know that. We appreciate your input and we try to make investor communications the best that we can for the benefit of all of you. '07 is turning out to be a strong, very successful year. If we look at it from an operational standpoint, the Northern Woods project got finished very late last year but started working well in 2007. The LNG plant, $108 million 1.2 Bcf plant finished in July right on time, went into rates, and actually will save our customers money. We settled three of the four rate cases that we have, capital expenditures are increasing, or were increased in '07, and operationally the company is doing extremely well. Lee will go into some of the details around that. '07, a pretty good year so far. We changed the guidance, as you know in the news release, and increased that. We do have the CL&P rate case that we're working through and we'll spend a little time chatting about the status of that. '08, another strong growth year projected and we gave you guidance for that in the earnings news release. It looks like that's moving along well. 2008 through 2012, continued investment opportunities that have been identified and quantified. One of the requests that you asked us was to begin to give you, especially on the transmission projects, some of the key milestones that you ought to be able to look for to see how we're doing, and we will try to do that today. Clearly, as we move through earnings conference calls into next year we will continue to do that. We try to give you milestones that you can calibrate our success against as we move through those programs. A pretty good five-year plan, pretty good outlook. Longer term outlook, I think there are opportunities for NU. They are clearly challenges for New England, but they are opportunities for NU, as we look as some of these trends that are hitting the industry. One of the questions that I get asked time and time again, what are the key things that NU has to do to be successful? So we thought we'd just put them on a slide for you. First and foremost, is we have continue to execute. We have to run the company from an operational standpoint and from a construction standpoint very, very well. If we don't do that, all of these longer-term strategies really are for naught. So continue to execute successfully. I think when Lee comes up and starts talking about the progress that we're making on the operational side, you'll see that we have continued to do that. Effectively deploy the capital that's in that five-year plan. Some of that's pretty much locked in right now. The three remaining Southwest Connecticut projects are on schedule, on time, on budget and the capital dollars are pretty well locked in, but there are some future projects that we will have to work through the siting process and through the regulatory process and do that in a way that we can deploy the capital that we have assumed we can over that period of time. Then clearly, we have to manage the regulatory business model in a way that we earn a return on the capital that we deploy. I think it is incumbent on NU, it operates in three of the six states in New England, our customers are very important to us and it is incumbent upon us to develop and deliver solutions that meet the regional energy needs and that's where I want to spend just a little bit of time with you this morning. New England is dealing with a series of energy challenges. High fuel prices, a tremendous reliance on natural gas generation, natural gas sets the clearing price about 90% of the time in New England, and led to high fuel prices and high electricity costs and clearly all of the issues associated with that. Peak load is increasing faster than base load. That drives a variety of different ways to look at distribution requirements. It drives a variety of ways to look at generation requirements, and it gives us the opportunity to do things to shave peaks. Whether that's energy efficiency, it simply brings down the total amount of energy that we use or whether that's some kind of demand response, peak shaving techniques that begin to bring down the peak. It does give us opportunities to begin to deal with an issue that New England sees. Of course, the renewable portfolio standards and RGGI. I'll spend just a little bit of time on those. Every state in New England has renewable portfolio standards. You can see by the slide that they differ in each state, they typically advance over time. Definitionally, they're different. What counts is as a renewable generation source in one state may not count as a renewable generation resource in another state, but there is a requirement to begin to meet all of those renewable portfolio standards. We expect that by 2015, New England is going to be about 1,500 megawatts short on renewables. That short position will not be distributed evenly across New England. The northern part of New England probably is slightly long, the southern part of New England we would expect to be very short. We're going to need to deal with complicated system planning issues around renewables and clearly it gives us the opportunity to build and strengthen the transmission grid. If any of you have talked to any of the technical experts at ISO, you know that as renewables become probably more than about 15% of the total capacity on the grid then things have to happen differently. They have to deal with the intermittency of renewables and the fact that sometimes when you most need them, they're not available. It adds a complicated challenge to the transmission planners, it adds a complicated challenge to the system planners, but it is something that we will be dealing with in New England and I think there will be opportunities for us. This is just a little slide that shows what we think are the growing gaps, essentially, between the renewable portfolio requirements and the amount of renewable generation sources that we have. By 2020, RPS requirements could be slightly less than 20% of the total system energy requirements. That equates to a gap of about 17 million megawatt hours or about 11% of the energy requirement in New England. We have got to do something about this. The gap exists. We don't believe the gap can be filled with existing or with planned generation currently in New England. There is right now about 1,900 megawatts of proposed new renewable resources in the ISO New England generator queue with 1,500 megawatts of that coming from wind. If all of that is approved, sited and built, we still project that there's going to be a gap of about 11 million megawatt hours. That's about 3,100 megawatts of wind, that's 2,000 additional 1.5 megawatt wind towers, just to put that in perspective for you. Now you can get different numbers depending on how you think about energy efficiency and how you think about demand side management. Those numbers can move around a little bit. But I think the message that we see clearly is that New England as a region, with those renewable portfolio standards, needs to begin to look outside of the region to meet those requirements. The RPS standards may not be the worst, or the most stringent. If you overlay RGGI on top of that, RPS standards typically are a percentage. So if you can change load growth, you can actually change the amount of megawatts requirements for the renewable portfolio standards. RGGI is an absolute number; so many tons of CO2 emissions. Right now, the RGGI requirements that will probably start at the beginning of 2009 would force New England to bring carbonations back to 1990 levels, that's a cap of about 56 million tons. Beginning in 2015, that cap goes to 90% of 1990 levels, which brings it down from 56 million to 50 million tons. In 2005, New England CO2 emissions were about 60 million tons. So in 2005, we are already at least 4 million over the first standard and potentially 10 million over the second standard and if the growth in energy requirements is about 1.3%, which is about where we expect growth to be in New England, C02 emissions grow to 74 million tons by 2020, which is a 24 million ton gap with the RGGI requirements. To put that in perspective, it means 36 million megawatt hours of CO2 emitting generation needs to be replaced with non-CO2 emitting sources. That's about 5,000 megawatts of base load generation, at a time when a lot of base load generation is not being built in New England. Even if DSM and energy efficiency hold energy growth flat, we've still got about a 10 million ton gap. We are going to have to do something about this and those challenges provide opportunities. This gives you two pieces of geography. One is the northern part of New England. You can see the biomass and wind opportunities that are there, nuclear. The other side is eastern Canada, hydro opportunities, wind opportunities and at least in New Brunswick, the desire to build a new nuclear plant to the extent that they can find off take agreements in New England to help provide for the capacity of that plant. Canada may be a source that allows us to meet some of these new stringent requirements. Clearly, if Canada is a source, there is some electricity flows that have to happen. There are a couple lines right now into Canada. There is some upgrading of some lines between New Brunswick and Maine right now, but it's not sufficient. If Northern New England has renewables, we're going to have to strengthen the north-west or the north-south transmission corridors in order to do that, to bring those renewables into the rest of New England. If we do things in Canada, whether it's wind, whether it's hydro, whether it's nuclear, there's going to have to be some transmission systems built that will strengthen and allow that power to flow. These are not a depiction of any particular route, but they just simply give you a picture of what may be possible going forward. We put this slide up just as a way to put it in perspective of what New England needs and what NU is doing. New England needs resources assembled to meet the opportunities. NU has organized an internal team to define the issues and develop solutions. Jeff introduced Jim Rob, our new Senior Vice President of Planning and Development. This is one of the two or three assignments that Jim has, is, okay, how are we going to do this? What's it going to look like? How do we position NU to continue to be a leader and how do we come up with solutions that not only are beneficial to the region, but also are beneficial to our company? Partnerships among key stakeholders are absolutely critical. We've already begun discussions with regulators, with legislators, with governors, with DPUC Chairman and with other utilities about this issue. We need to begin to define the discussion with facts, so ultimately we'll be able to reach a solution that is in the best interest of not only the region, but also hopefully our companies. We need an expanded dialogue to identify a portfolio of solutions, and again as I said, we've been meeting with folks within New England and in Canada about the appetite to bring power from Canada into New England and what that would actually take. New England needs results. The last statement there says we will put solutions on the table. We have to do that. If we talk philosophically, we'll debate things. We'll debate things to death. When you put a solution on the table, it focuses people's discussion. It may not ultimately be the final solution. But it does focus people's discussion and it brings a certain amount of rigor to the debate and we need to do that in New England and we expect NU to take a leadership position doing that. It's an exciting time in this industry. There are a lot of opportunities as we begin to deal with regional portfolio standards, RGGI, energy efficiency, a lot of the new technologies that are coming along and we expect to be involved in all of those things, be right in the middle of it for the benefit of our customers, and be a leader in each of those areas. Before I turn this over to Lee, there's one other announcement that I would like to make. Another question that we received from a number of you, especially around the transmission projects, are do you have the components, the transformers, the cable, all the different pieces of the component parts to build these, do you have the labor to build them? Because you see what's happening across the country, but you also see what's happening across the world. You can see the shortages in those key commodities impacting companies' abilities to carry out their plan. You have at your table, at your places a press release that was just released this morning by Quanta Services. Quanta is a national, very large transmission constructor. They have worked with us on a number of projects, in fact they're working with us very closely right now in the Middletown to Norwalk project and we are very pleased to announce that we have just entered into an MOU with Quanta so that they will provide the labor necessary to build about $750 million of that transmission build that we're going to see over the next six years. John Colson, the Chairman and CEO of Quanta is here today. John, will you please stand up? He will be available after the program to answer any questions that any of you might have. We are really excited about this partnership. This is going to ensure that we have the labor. I think Lee will talk a little bit about the fact that we're making significant headway about some of the other component parts, but it will ensure that we have the labor to actually execute around this fairly aggressive transmission stance. With that, let me stop and turn it over to Lee Olivier, our Executive Vice President of Operations who will give you an update on where we stand operationally; and then Dave McHale, our Chief Financial Officer will come up and talk a little bit about the financial ramifications. Thank you.

[Lee Olivier:]

Thanks, Chuck and good morning. It's good to be here with you all this morning. Chuck talked a lot about the NU direction and the NU strategy. Of course, pivotal to that is our ability to execute around that strategy. What I would like to do with you this morning is update you on where we are in terms of our execution of our strategy. I would like to talk a little bit about our forward capital investment plan, where that money is going. I want to give you a status of our major infrastructure projects, in particular transmission, and give you examples of how these projects are improving reliability and at the same time in many cases, actually reducing cost as well. First of all, our system reliability this year has been very, very strong, particularly at CL&P. If you remember last year, we had a number of outages in our underground systems. We've managed to avoid these this year. CL&P is on path to having probably its best year in reliability over the course of the last ten years as a result of the work we've done there. We've also just recently successfully completed our North American Electric Reliability Corporation audit of our transmission operations. We were one of the first transmission businesses in the country to have that audit. That's really crucial, because that really helps to define what the risk profile is, particularly now that NERC can implement civil penalties of up to $1 million a day. We went through that audit, with no violations, no substantial findings. In fact, NERC said that we were really the standard setters inside of the industry. In fact, we have brought in a very strong team of folks to run the compliance part of the business. They're all folks that have extensive background in nuclear, so they really understand what compliance is all about. We've been asked actually to speak in a number of venues about how we've done that. Also, our capital program, a $1.3 billion capital program is on target for this year. Our spend will end pretty much on target by the end of the year. All of our major infrastructure projects are essentially on schedule and on budget. Chuck talked about the L&G facility that was completed in Waterbury, Connecticut. That facility was completed on time, on budget. The tank is full, it's ready for the heating season and I'll talk about some of the value that produces for customers in the next slide. Also, our Bethel to Norwalk project, the first big transmission project that we built and put into service last year has really performed essentially flawlessly. It's been in service 100% of the time and is savings customers a significant amount of money. Our fleet in New Hampshire, our cost of service fleet in New Hampshire is meeting and exceeding all of our targets. That's mostly coal-based power plants and as a result of that we had the lowest overall average fleet cost in New England. Of course, that's the cost of service of the fleet. Northern Wood Power Plant, which Chuck mentioned went into service late last year, that has run extremely well and is generating significantly below the market. I'll give you some idea of what that means in a minute. Finally, our next major project, which is our NEEWS family of transmission projects, they are on track, we're making significant progress on those and I will update you on those on a particular slide. If you look at where does the money go? It clearly goes into three buckets

[Dave McHale:]

Thank you, Lee. Let's see if I can just spend a few moments and translate this into some facts and figures. First of all, in terms of 2007 we already mentioned it, we are revising guidance. In fact, we are increasing guidance for the year following yet another good quarter for us. We have traditionally rolled out our next year's guidance at EEI. Again, we'll do that for you and you'll see the figures shortly. The backdrop of our longer term plan is a new $6 billion capital program which also introduces 2012, we keep that five-year horizon in front of you. That of course is the very foundation of our rate-based growth; that, along with ROE improvement gets this 10% to 14% return or growth rate equation continuing to work for us. I think it's worth saying and I'll spend a little bit of time and give you some specificity around capital, very financeable from our perspective and we as a management team remain very, very focused on the overall total shareholder return equation. First in terms of the quarter, we won't go through this extensively, but I think if you look at the overall business, we earned $0.32 for the quarter, $50.2 million, up substantially over last year, up about 34%. If you look at the individual segments, each of those, particularly the distribution business, is up substantially. There's a little asterisk on this page. We have included here for comparative purposes the elimination of the one-time, $74 million tax benefit that CL&P received in the third quarter of last year, so year over year the distribution or the collection of distribution companies earnings up 100%. If we look at what's happening with transmission, up 10% for the quarter, which is a little lower than our run rate and it's worth saying there too that during this particular quarter we did rebate or refund back to customers about $3.5 million pretax, it was about a $2 million hit on our earnings as a result of an ROE decision that we received from the FERC earlier this year. If you look at the results through the first nine months of the year, equally attractive; again $173 million across the enterprise, $1.12 a share. If you look at the transmission business here, its results are up 31%. That's a better run rate overall. As Lee suggested, the projects are on track. We are deploying the capital and that rate trajectory is working for us and the overall distribution business is up 30% as well. Let me break that one down a little bit, because it's worth focusing on. These are our four distribution companies and if you look year over year, all the results here too are up. Each one them has a story, but I think collectively for New Hampshire, Western Mass, and for Yankee Gas, a lot of this has to do with what we think are really constructive rate settlements that are now in place. You're seeing the full effect of that for Western Mass; less so for Yankee. That just went into effect mid-year. You'll see that in the ROE figures in one moment. A little bit of a story for CL&P. CL&P, although earnings were up 10%, on an ROE basis, they continue to under perform, hence the need for the Connecticut rate case and we'll touch on that in a moment. This is a relationship that we've shown you in the past. It's a correlation between our rate base and our net income. It's meant to demonstrate two things

[Jeff Kotkin:]

Thank you very much. We'll take some questions and then we will stay around here afterward. We also have a visitation from 2