Northeast Utilities Earnings Call Nuggets: Earnings Growth, Cost Reductions
Greg Gordon – ISI: First I wanted to say congratulations, I know how long and hard of a road this was to get to this point and I’m sure you guys will do a great job. And Jim, the questions for you, I know you’re attempting via this call to sort of give us verbally a lot of the puts and takes that you are looking at and what’s going to be a very unique year because of all the transition costs and the weather and all the other things that are happening, at some point are you going to be able to A, give us what you see is sort of a normalized earnings number for this year? And B, confirm that you still believe that this is a company that can grow with the 6% to 9% earnings growth rate that was articulated when the deal was announced off of what would otherwise be a normal base level of earnings?
James J. Judge – EVP and CFO: Greg, as I indicated we’re not prepared to sort of talk specifically about 2012′s guidance or the long-term rate. I think you got a sense from Tom, Lee, and my comments that we are bullish on the company. We think we’ve got great opportunity ahead. When you look at both of these companies and saw in the track record certainly over the past five or ten years performance has been well above industry average in terms of earnings growth in terms of total shareholder return so the new venue up is a very long track record of notable and consistent success for investors. What we’d like to do is make sure that we have the team in place that we develop a plan that we have broad consensus upon, that we review that plan and get the endorsement of our Board. At that point in time, we will provide guidance to Wall Street of a plan that we’re very confident and that we’ll be able to achieve. So, we will provide guidance but it’s not going to be on this call.
A Closer Look: Northeast Utilities Earnings Cheat Sheet>>
Greg Gordon – ISI: We look at the starting point, would it be fair to go back to all the structural drivers that have been in the presentations to-date, and just think about how those things have changed for better or for worse, I guess. So, the one thing that I know has just come up has been – for the quarter just came out today. I know it was probably not the best timing given the earnings call, but can you comment on what do you think next steps will be in your relationship with the Massachusetts AG around the FERC’s proposal that you went to settlement talks?
James J. Judge – EVP and CFO: Yeah, you’re right, it just did come out. I think I got to see it about 30 minutes before this call, haven’t had any discussion obviously with their advisors, FERC Counsel or senior team even. I still feel that our position is sound and the existing rate is fair and reasonable, and apparently Commissioner Moeller who dissented actually agreed, so we’re not going to speculate on our response. It’s too early to predict an outcome. It could be a litigated outcome that would take 15 months or it could be a settlement prior to that. What I would point out is that, we have very good track record in both arenas; litigated cases as well as rate settlements, so I think I am confident at the end of the day, we’ll have a reasonable outcome.
Jeffrey R. Kotkin – VP, IR: Travis Miller, Morningstar.
Travis Miller – Morningstar: Again, another congratulations on getting the deal done. I’m concerned about your ability to integrate the sports team that you guys root for, but good luck with that. A question on Yankee Gas, the CapEx spending that you’ve laid out in the past, how could that effected if you sustain this 5% plus type normalized growth and is that baked into a low growth portion that you laid out?
Leon J. Olivier – EVP and COO: Travis, this is Lee Olivier. The current budget that we have at Yankee, so it really looks like spending about $565 million over the course of the next five years, when we put that together last year we baked in the current growth rates that we have now which is about a 5% growth in gas sales. So, I think we will be well equipped to stay within that. I think we have flexibility in and around other work we can do with Yankee Gas. So, I think that currently is a good number. Now there would be legislation that gets passed in Connecticut that spurs shall we say conversions, as results of subsidies that the state is willing to provide then that’s a different story. Then we’d have to go back and take a look at what that does to our capital program.
Travis Miller – Morningstar: Does that 5% get you to the allowed ROE or does that get you well above emitting or earning your allowed ROE based on those projections?
Leon J. Olivier – EVP and COO: That would get us to half of the allowed ROE right now.
Travis Miller – Morningstar: Above, sorry, I didn’t catch it.
James J. Judge – EVP and CFO: I think there are obviously a number of variables – and this is Jim, what are the O&M synergies that we were able to achieve. So I think, we obviously have sales growth opportunities that should allow us to continue to have a very favorable ROE. If you look at the ROEs that the NU family of companies produced last year, they were all approaching the allowed ROE numbers. So I think there is reason to believe that we can continue to maintain that kind of performance going forward.
Jeffrey R. Kotkin – VP, IR: (Ashar Khan).
Ashar Khan: Can I just ask just for reference purposes, what is the – I know I had it for NU, but what is for the combined company as we have now. What is the 100 basis points on transmission variance equals positive or negative delta on earnings? Is there a number that you can share with us with the combined entity and the new share count?
James J. Judge – EVP and CFO: Yes, Ashar. I think we actually disclosed in our 10-Q rule of thumb there, and I think that the 10 basis point change is worth $2 million of net income.
Ashar Khan: That’s for the combined company?
James J. Judge – EVP and CFO: That’s for the combined company.
Ashar Khan: Then can you just a little bit tell us where we stand on this transmission line? How the process is going along and when can we hear some more definite information on the routes and everything from you guys?
Thomas J. May – President and CEO: Ashar, I think you are referring to Northern Pass?
Ashar Khan: That’s correct.
Leon J. Olivier – EVP and COO: Ashar, this is Lee. Where we are right now is in procuring the last 40 miles of the right-of-way, and I can tell you we are making very, very strong progress in lining up there right away. I think we’re on half for the middle of the year, approximately August timeframe to have the right-of-way secured and then to be prepared to file with the DOE the root and then start the environmental sampling process that is required, it’s a two season process, so it’s kind of a spring and fall process, spring, fall, winter, so we’ll be ready to go and should we stay on that schedule we would be ready to have the project go in service in late 2016. So we continue to work with HQ around the issues and technical aspects of the project, continue to line up the land, we continue to do outreach in the communities, particularly in the northern New Hampshire we continue to meet with other key stakeholders in New Hampshire to continue that influencing process around the project.
Ashar Khan: If I can just ask one more question, the pension that you mentioned for a new standalone which would be kind of like something like $0.10 or something, does that reverse next year or is it just it’s going to reset this to a lower base of earnings, I’m a little bit confused?
James J. Judge – EVP and CFO: It is a $0.10 increase this year that we think goes away next year so that the pension cost estimate for 2013 is going to look more like 2011.
Jeffrey R. Kotkin – VP, IR: Jay Dobson, Wunderlich.
Jay Dobson – Wunderlich Securities: Great job of getting the merger done. Jim, I was hoping you would talk about the cost reductions and I know you were alluding to that and some of the drivers to earnings, but just how that order flow, obviously interested in 2012, but maybe even ’13, ’14. I know it’s early, but how should some of this cost reduction flow, meaning how fast can we achieve them is what I am getting at just for clarity?
James J. Judge – EVP and CFO: We had in our net benefits analysis that we filed with the regulators. It was essentially a four year ramp-up of savings largely driven by attrition opportunities in terms of staff reductions based upon retirements, not backfilling position, so it was a slow ramp up and then continued escalating at a lower rate beyond that. I think we’re looking long and hard at that issue. I think we recognized that – we’ve had a very conservative approach to that study and I think we have an opportunity to actually accelerate some of those savings that we had targeted in that original plan. So, we have in the past done a merger, if you go back 10 years in terms of the NSTAR’s experience, the Boston Edison Commonwealth merger. We were able to extract cost out of the Company and we did it steadily over a number of years, so that the earnings impact tended to be progressive and as we – long time after the merger. So, we hope to have the same opportunity here.
Jay Dobson – Wunderlich Securities: I’m not sure to who to address this, so I’ll address it to you Tom and maybe you could throw it out to whoever you think and I’m back to the FERC issue. Can you just talk a little bit about how you’re seeing FERC right now obviously we are short of commissioner, how that plays into what they announced today? I appreciate – I am not sure who made the comment, but that Commissioner Moeller was dissenting on what they released today, but just play into sort of how you’re looking at FERC right now?
Thomas J. May – President and CEO: That’s a tough one. As you say it is influx, they are waiting for a new commissioner. It will result in a full commission, so that you can get a majority of hung jury, but this obviously came out before that and it’s on the surface it’s just simply sets us up for a rate proceeding, if you will, on the issue of what is the right return. As Jim said it’s new to us. It caught us a little off guard. We weren’t expecting it today. We’re still sorting through it, but we at the stage aren’t reading anything into with other than as Jim said we believe we have a strong basis for our position, and we’re just going to take the next steps.
Jeffrey R. Kotkin – VP, IR: Michael Lapides, Goldman Sachs.
Michael Lapides – Goldman Sachs: A couple of questions. One, on rate increases or rate changes, I just want to sanity checks on some of the things you said regarding New Hampshire and Connecticut. In New Hampshire, can you walk us through both the distribution rate changes expected over the next year or so and how much the Merrimack related one would be?
James J. Judge – EVP and CFO: I don’t have that information readily available, Michael.
Michael Lapides – Goldman Sachs: Just real quick on the Merrimack one. Is that rate change dedicated to that project? Is that not something that’s already a known amount?
James J. Judge – EVP and CFO: Yes, we get temporary recovery of about two-thirds of our cost of scrubber and the PUC up there will have a final order that will determine the prudence cost recovery amounts and what will be in rates going forward. So, it’s a preliminary estimate to be decided with the final order at some point later.
Leon J. Olivier – EVP and COO: I’d just add in too, Michael, that we have over-collections at PSNH as a results of forecasting rates around energy and the actual rates around energy in terms of what our procurement has been significantly under that. So, although there will be an impact, we don’t think that would be a huge impact on PSNH customers.
Thomas J. May – President and CEO: Michael, I think also Jim mentioned earlier that there was a rate increase that was due to additional construction and distribution facilities that was dialed into that five-year rate decision. We estimate right now that’s about $6 million, $7 million in the middle of the year. There will be storm true-ups and everything. So, I don’t have that full number for you right now, but you’re looking at a change in the middle of ’12 and also for what Lee was talking about once the generation docket is over, once the prudence docket is over, you are probably looking at another reset at the beginning of next year, but that rate not only will it reflect the scrubber, but all the other purchased power that goes into that energy rate for PSNH. But it’s only tough to answer that question, exactly how you produce that.
Michael Lapides – Goldman Sachs: But if I just to back of the envelope, you said you got about two-thirds of the cost of the scrubber in rates in recovery right now. So if I just do one-third times the cost, times your WACC that directionally gets me there, just kind of thinking 50,000 foot level?
Thomas J. May – President and CEO: I think so.
Michael Lapides – Goldman Sachs: Second, Connecticut, can you touch a little bit about the infrastructure tracker, how much you’ll spend per year when the revenue changed tied to that will go into effect?
James J. Judge – EVP and CFO: You can think of it as $300 million, roughly $50 million a year for six years. Our base case right now is, to think of it as $50 million for 2013 and 2014 and we’ll let them propose it at the pure for recovery…
Thomas J. May – President and CEO: With the docket in midyear, the docket will purpose an infrastructure hardening, as Jimmy said, the agreement limits that by about $25 million of rate revenue recovery each year.
James J. Judge – EVP and CFO: So you’ll see something by midyear.
Michael Lapides – Goldman Sachs: So if you file midyear, it probably goes into effect sometime early 2013, if you spend $50 million and if I just apply high-level of 10% pre-tax WACC, that’s roughly $5 million a year rate change?
Leon J. Olivier – EVP and COO: Michael, we could take some of the numbers offline and look at what actually is being, has been filed and what may be filed in New Hampshire.
Jeffrey R. Kotkin – VP, IR: (Paul Patterson, Glenrock Associates).
Paul Patterson – Glenrock Associates: All of my questions were answered, but and I apologize if I missed this, did the quarter include a leap year, through the sales growth, excuse me?