Feb 21, 2008
Executives
Jeffrey R. Kotkin - VP, IR Charles W.
Shivery - Chairman, President and CEO Leon Olivier - EVP of Operations David R. McHale - Sr.
VP, CFO and Principal Accounting Officer
Analysts
Anthony Crowdell - Jefferies & Co. Jonathan Arnold - Merrill Lynch Michael Lapides - Goldman Sachs Ross Fowler - Lehman Brothers Paul Patterson - Glenrock Associates
Operator
All participants will be in a listen-only mode throughout the question-and-answer of the conference. [Operator Instructions].
The conference is being recoded. If you have any objections you may disconnect at this time.
For today's call is Mr. Jeffrey R.
Kotkin, Vice President of Investor Relations. Mr.
Kotkin, you may begin.
Jeffrey R. Kotkin - Vice President, Investor Relations
Thank you. Good afternoon and thank you for joining us.
I am 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, will oversee our regulatory businesses.
Also in the room today are Jim Muntz, Senior Vice President and Head of our Transmission business and Shirley Payne, our Vice President and Controller. Before we begin, I would 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 commission of the U.S Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and uncertainties which may the cause the actual results to differ materially from forecasts and projections. Some of these factors are set forth in the press release issued yesterday evening announcing our earnings for the fourth quarter of 2007.
Additional information about the various factors that may cause actual results to differ can be found in our Quarterly Report on Form 10-Q for the third quarter 2007 and also in our Annual Report on Form 10-K for the year ended December 31st, 2006. Now I'll turn over the call to Chuck.
Charles W. Shivery - Chairman, President and Chief Executive Officer
Thank you Jeffrey. Thank all of you for joining us this afternoon.
2007 was a very strong year for us, as well as the first full year when we were operating under our fully ventilated business model. That's more than a transition year of '06.
2007 was indicative for what this company can accomplish. From an operational perspective, we continue to make significant progress on a number of initiatives.
Our Southwest Connecticut transmission projects continue to move forward with about 70% of the aggregate work for these projects, compared to 30% at the end of 2006. We continued to move forward with the next generation of major transmission projects, also we expect to be completing between 2011 and 2013.
Our New Hampshire generation including our new renewable energy in New England [ph] operating very well and providing measurable costs and environmental benefits to New Hampshire. On the distribution side, we settled distribution rate cases at Public Service of New Hampshire and Yankee Gas and experienced significant financial improvement of those subsidiaries.
Earlier this year, we concluded the CL&P rate case. While we appreciate that the Connecticut Commission was faced with a difficult decision in light of increasing cost pressures on our customers, we're disappointed with the disallowance of several legitimate operating costs and with the 9.4% return on equity.
In 2007, we were able to effectively deploy capital on all parts of our business, and have seen an improvement in distribution reliability as a result of those efforts. And from a financial standpoint, we also made considerable progress.
By earning $1.59 per share, we exceeded the high end of our initial earnings range of a $1.30 to a $1.55 per share. And we are near to top of our revised range of a $1.45 to $1.60 per share.
Given our strong earnings for 2007, we appropriately changed our five-year growth rate projections to reflect our highly 2007 earnings level. And we continue to remain optimistic with respect to the company's future opportunities.
Dave will discuss this item in more detail in a moment. 2007 was also a year during which we made progress on many of our longer-term energy issues facing our customers in our region.
In Connecticut, at the beginning of month, we and United Illuminating jointly filed the State's integrated resource plan in about a decade. This plan looks out over the medium and longer term to estimate the State's future power needs and how best to meet them.
This plan is now before the Connecticut Energy Advisory Board, which will review, modify and forward that plan to our utility regulators this spring. The foremost important recommendations in that filing are related to develop the strategies to meet the state's increasing renewable energy requirements, reduce dependence on natural gas generation, increase the demand side management investments and increase the distribution utilities flexibility and arranging for long-term supply options.
In just over a week, we and others will file applications to build peaking generation in Connecticut. Like the integrated resource plan, this application is required under Connecticut's 2007 energy legislation and we applaud the state from making its long-term power supply challenges and considering innovative solutions.
In New Hampshire, the legislature last year requested an analysis of the transmission upgrades that will be necessary to support increased with numerable energy development in northern New Hampshire. Regulators completed that analysis in December and forwarded a report to legislators noting that to develop 400 to 500 additional megawatts of renewable generation could require investing up to $200 million and additional transmission infrastructure in Northern New Hampshire.
We are encouraged that New Hampshire officials are showing keen interest in developing this indigenous energy source and we are working with them towards making this a reality. Although we haven't discussed the topic of our litigation with ConEd for a number of months, I want to provide and update of recent events.
In January the judge ordered the parties to be ready for a trial as early as March 25th. As you will recall ConEd claims that NU breached the 1999 merger agreement.
ConEd seeks to recover what it claims would have been its share of the merger synergies totalling some $314 million such as merger-related cost and expenses of about $32 million. These figures do not include prejudgment interests.
NU believes there is no merit whatsoever to this claim. NU claims that ConEd breached the merger agreement by repudiating the agreement and refusing to close in March 2001.
You may also remember that NU originally sought to recover the merger premium on behalf of its shareholders, but the appellate court ruled in October of 2005 that the merger agreement did not provide NU shareholders with the right to sue ConEd for breaching the agreement. NU seeks to recover its merger-related and costs and expenses of about $27 million on this claim, and number is also before including prejudgment interests.
ConEd contends that it was excused from closing, because NU suffered various materials adverse changes all of which NU disputes and believes are entirely without merit. 2007 is behind us, but the accomplishments were important because they are indicative of what we can accomplish both in 2008 and beyond.
Sighting and managing large transmission projects is not an easy scale to develop, but it's become a core competency for us. Converting a 14-year old coal unit to a 15 megawatt low emission wood-fire generating plant and operating it successfully shows that we can creatively address the region's environmental concerns.
On that note, we continue to see the development of renewable generation, not just in Northern New England but also in Canada as a logical and important options for meeting New England's future energy needs. We have positioned in US the catalyst for developing a consensus among the regions stakeholders as to the best alternatives to meet these critical energy requirements.
To continue this momentum, we have appointed a team inside NU under Jim Rob our New Senior Vice-President for Enterprise Planning and Development to work on this initiative and to provide an objective and informed discussion of the energy requirements of the future. In fact in December, we've presented a transmission concept of ISO New England's DC Day that would link Hydro-Quebec's considerable generation resources to the low salaries in New England.
Nevertheless, several months we've initiated discussions with many of the region transmission owners, regulatory and legislative leaders, the ISO, and with the Canadian Company's interested in this opportunity. We expect to continue these discussions and would hope to have a better defined set of solutions by the second half of the year.
All in all, I'm very pleased with 2007 results and optimistic about our prospects. Lee and David will now provide some additional details from both an operational and our financial perspective.
Leon Olivier - Executive Vice President of Operations
Thank you Chuck. Well I'm going to start by excellent success assessment of 2007.
From an operational and capital investment standpoint, 2007 was a very successful year. Our transmission distribution reliability was generally above our targets creating benefits for our customers.
We invested a record $1.28 billion in our infrastructure, $762 million of which went into our transmission system. The Yankee Gas' LNG facility entered service on schedule in the 2007 and on its $108 million budget and was still in time to provide benefits for our customers in the form of lower commodity and pipeline costs this winter.
On January 3rd the company saw a demand for natural gas reach over $332 million Btus. This represents the highest record send out day ever for Yankee Gas.
With peak prices out $22 per million Btus which is more than double the cost of inventory in our LNG tank. Public service New Hampshire's Northern Wood 50 megawatt renewable energy plant reported a 77% capacity factor in the first year of operation, burning 481,000 tons of wood chips in one of the cleanest burning biomass plants in the country.
Dispatching at a negative price when you consider the renewable energy and tax production credits. Our primarily coal-fired based load generation recorded an aggregate capacity factor of about 85% and has held PSNH keep its average rates well below those of other new utilities.
As we look forward, we see more opportunities to increase our regulated generation earnings with projects that also will have significant customer benefits. We continue to work with the Washington Group on design and permitting applications for a wet scrubber for our two coal-fired units on our Merrimack generation facility in New Hampshire.
We expect to provide you with more specifics about our proposal later this year, including an update on our $250 million cost estimate for this project. The project must be completed by 2013.
As many of you know, we are also preparing an application to build rate-based peaking generation at sites in Connecticut. On February 1st, CL&P announced they would seek to build 450 megawatt units or up to 200 megawatts on land that CL&P owns adjacent to our Card street substation in Lebanon.
We also will seek to build two units of our 65 megawatts near the LNG, facility in Waterbury, Connecticut. These applications are required by Connecticut statute.
Our proposal in competing proposals will be filed with the DPUC, around March 3rd and the final commission decision is due by the end of June. The DPUC has indicated it may select up to 500 megawatts.
If our projects are approved The Waterbury facility PBM service in early 2010, and the Lebanon unit in mid 2010. As you may recall these potential capital projects would be incremental to the capital forecast we provided you at the EEI conference.
We invested just over $500 million in our distribution and generation systems in 2007, and expect that level investment to rise to nearly $600 million in 2008. But since all of a nearly $100 million increase will be at Connecticut light and power and public service of New Hampshire.
Where in recent rate cases, regulators have endorsed our investment in infrastructure to improve reliability. CL&P liability improved in 2007 over 2006.
That improvement was driven partially by less severe weather but also by some upgrades we continue to make on the CL&P underground and overhead systems. The clear message recent CL&P rate case is that the DPUC want just to continue to address obsolescence on our distribution system, and it approved a $290 million distribution capital program in 2008, all by a $285 million distribution capital investment program in 2009.
In addition to the $290 million on distribution infrastructure, we expect the CL&P to invest up to about $10 million in 2008 on a DPUC endorse advance metering infrastructure pilot program for about 2000 customers that will test both the AMI equipment and technology, as well as to response by subset of customers to time of use rates. We will file the plan for DPUC in mid March to implement the pilot and report back to the commission no later than December of 2009 on the results.
Expenses related to the pilot, including a return in our investment will be recoverable through a tracking tariff on our allowed 9.4% return. At PSNH the increase level of investment is primarily due to the implementing of the liability enhancement program that resulted from our rate case settlement last spring.
Turning to our transmission business. 2007 was a very strong year in terms of operation and building out of our transmission systems.
Reliability was good and we received a very strong NERC audit of our transmission operations. We made significant progress on our other three remaining Southwest Connecticut projects.
Two of which we expect to complete later this year. Currently, our $223 million 115 kV Glenbrook cables project between Norwalk and Stanford Connecticut is about 73% complete and is expected to enter service by the end of this year.
On our Long Island cables replacement project a specially outfitted ship is currently laying the new solid core cable manufactured in Norway, between Norwalk Connecticut and Northport Long Island. This replacement cable, the key element of our $72 million investment, should be in service December.
Overall, the project is about 71% complete. Our $1.050 billion share of the 69 miles 345 kV Middletown-to-Norwalk transmission project is about 69% complete.
Although the initial project to completion date was December 2009, we are currently several months ahead of the schedule and now expect to be completed in the mid 2009 timeframe. Because of 50% of the carrying cost on the project are currently being capitalized rather than earning a cash return, every month we can accelerate its completion, we'll reduce its ultimate cost by about $3 million and improve our near-term cash flow.
The mid 2009 completion also will allow the cable to be available for the summer of 2009, enhancing the region's reliability at peak demand and providing additional savings to customers. As we move forward toward completion of our Southwest Connecticut projects, we are working with National Grid and ISO New England to design another major set of projects to better reinforce the grid in Western Massachusetts and the connections between Massachusetts Connecticut and Rhode Island.
In December, we received a very favorable vote from the ISO New England Reliability Committee on our technical analysis of the 115-kV transmission system and in and around Springfield Massachusetts. We've filed an application in Massachusetts Energy Facilities Siting Board on the Springfield underground cables project in December and expect to complete the siting process in the early 2009 and construct the new facilities between 2009 and 2011.
Secondly, we are working with ISO New England on three new overhead 345kV lines in Connecticut and Massachusetts to better connect the major East-West transmission interfaces in Southern New England. We expect to undertake this work in coordination but significant enhancements National Grid is planning in Rhode Island and Central Massachusetts.
ISO is currently conducting technical reviews of these projects, which we expect to conclude in the mid to late 2008 timeframe. As we've said previously, once we complete those reviews we expect to file a siting applications with Massachusetts and Connecticut regulators.
While the siting process for the Springfield cables and NUS are separate, certain aspects of the projects are related, particularly the underground cables project and the greater Springfield reliability project. The latter a new 345-kV line we expect to build from Ludlow, Massachusetts Northeast of Springfield to North Bloomfield Connecticut.
Modifications to the Springfield of 115-kV underground projects can affect to greater Springfield 345-kV overhead project and vice versa. In addition, to the technical review, we continue to work with ISO to reassure that the design of those projects balance the needs for reliability, operational flexibility and cost.
Once this is complete we will provide cost updates on all of these projects. Up this time expect those updates to take place around midyear 2008.
As a result, for now we will retain our cost estimate for the Springfield cables of $350 million and our estimate for the NUS project are about $1.050 billion. However, as we continue to review the designs of the NUS project with ISO over the coming months, I expect these figures to change.
We continue to work with ISO in many other areas to improve grid reliability and capacity, reduce congestion, meet high FERC transmission standards and address public policy initiatives. As Chuck mentioned earlier, we're working with New Hampshire regulators and lawmakers our new transmission to connect renewable facilities in Northern Hampshire.
Those expenditures are not reflected in our $3 billion five-year transmission capital budget nor or any new line connecting of the U.S with Canada. Yet, we believe both of these initiatives have significant potential to help NU to connect to the renewable energy sources, the region will require in the future and under current state statutes.
Now, I would like to turn it over to Dave McHale.
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
Thank you, Lee. As Chuck noted in 2007, we earned $246.5 million or $1.59 per share.
Those results were above our initial guidance on a $1.30 or $1.55 per share, and just above or about at the very top of our revised range of $1.45 to $1.60 per share we announced last November at the EEI financial conference. Comparing these results for 2006 excluding non-recurring items, net income for our regulated businesses including a new tariff and other affiliates increased from a $178.2 million or $1.15 per share in 2006 to $234.8 million or $1.51 per share in 2007 representing an EPS increase of nearly 32%.
In terms of business performance, every segment was within or above our initial guidance. Our Distribution and Generation segment earned a $146.2 million or $0.94 per share above our initial guidance of $0.80 to $0.90 per share and near the top end of our revised guidance from $0.85 to $0.90 per share.
Those results were due to a combination of improved sales, well managed costs rate release and frankly some good fortune in having a relatively benign year for severe weather. Our parent segment earned 6.1 million or $0.4 per share near the upper end of our initial range of $0.00 to $0.05 a share.
There we benefited from the interest we earned on the cash we received from our competitive generation sale in 2007. At the competitive businesses, we earned $11.7 million or $0.08 per share.
We had initially projected breakeven results for the competitor businesses and later earnings were $0.05 per share. The improved results were due to sound management of our existing wholesale positions in closing out some contract in our former services business at favorable terms.
In transmission, earnings were up $22.7 million or 38% over those of 2006. We earned $0.53 per share within our projected range of $0.50 to $0.60 per share.
Let me drill down a bit more in 2007 results, then I would like to spend some time commenting on our financial prospects for 2008 and beyond and touch on the financial and capital requirement necessary to achieve our long-term growth plans. For us at the distribution companies, net income at PSNH Western Mass and the Yankee Gas were much better than 2007 than they were in 2006.
A primary driver of that improvement was higher distribution revenues. PSNH's Distribution and Generation segment earned $12 million in the fourth quarter of '07 and $43.7 million for the full year compared with $5.8 million in the fourth quarter of '06 and $27 million for the full year.
Primary reasons for the earnings increase were the impact of distribution rate settlement that was effective July 1, 2007, a lower effective tax rate a 1.2% increase in sales and the full year operation of the Northern Wood Power Project. PSNH finished up the year with a combined regulatory distribution and generation ROE of 9.5% in 2007 compared with about 6.4% in 2006.
PSNH's authorized distribution return is 9.67%. Also I should know that on affected January 1, 2008 PSNH's authorized generation ROE which is incorporated into a tracking tariff rose 9 basis points from 9.62% to 9.81%.
Western Mass Electric Distribution segment... distribution earned 4.9 million in the fourth quarter of 2007, and $18 million for the full year 2007, compared to a $2.4 million in the fourth of '06 and $11 million for the full year '06.
The increase resulted primarily from higher distribution levels. Western Mass' distribution regulatory ROE was 9.7% in 2007 compared to about 9.6% in 2006.
Yankee Gas earned $12.1 million in the fourth quarter of '07 and $22.6 million for the full year 2007 compared with $5.5 million in the fourth quarter of '06 and 11.9 million for the full year of '06. Yankees significant improvement was due primarily to higher distribution revenues during higher sales and implementation of a rate settlement and incorporated into rate base the Yankee's 108 million, LNG facility effective July first 2007.
Primarily due to colder weather, the Yankee's firm sales were up 15.7% in the fourth quarter in '07 and 10.3% for the full year '07, compared with the same period for 2006. Yankee's regulatory ROE, which did benefit from six months worth rate relief [ph] during the year was 8.7% in '07 compared with 5.9% in 2006.
Yankees allowed ROE is 10.1%. Turning to CL&P the year-over-year comparison is somewhat more complicated.
In 2006 CL&P's distribution segment is anticipated from the $74 million reduction and tax expense related to an IRS' private letter ruling and a 7.7 million gain related to the competitor's generation sale. Both of these gains were not backed during the CL&P ROE.
So even though CL&P distribution business earned $147.6 million in 2006, its regulatory ROE was only about 7.5%. After those gains CL&P's distribution segment earned $65.9 million in 2006.
In '07 CL&P's distribution segment earned $61.4 million equating to a regulatory ROE of 7.9%. CL&P's earnings were also affected by higher operating and interest expenses which were only partially offset by $7 million distribution rate increase effective July 1, '07 and 1.7% increase in retail sales.
Transmission earnings rose from $59.8 million in '06 to $82.5 million in 2007 or 38%. Fourth quarter transmission earnings rose from $16.2 million in '06 to $25.5 million in 2007.
About $20 million of the nearly $23 million increase consolidated full year transmission earnings between '06 and 2007 occurred at CL&P which is investing heavily in Southwest Connecticut's transmission infrastructure. Let me now turn to prospects for 2008, overall our guidance for the year is $1.65 to $1.90.
Adjusted somewhat from our initial guidance of $1.65 to $1.95 first provided to you last November at the EEI Conference. The change in guidance reflects an increase in Transmission segment guidance from $0.70 to $0.80 per share but to now $0.75 to $0.85 per share.
It also reflects a decrease in Distribution and Generation segment guidance from $1.10 to $1.25 now $1.05 to $1.15. We continue to view the competitors segment as a breakeven business and continue to view a new parent affiliates in a negative $0.15 to negative $0.10 range.
Midpoint to midpoint, we reduce guidance by $0.025 largely reflecting more modest prospects to CL&P given their recent rate case provision. I will touch on these issues somewhat, but let me give you a more detailed financial assessment of the rate case outcome.
We originally announced the DTEC in our July 2007 filing to an increasing revenue of $189 million in 2008 and $22 million in 2009. Based in part on our 11% ROE, 49.5% equity rate making capital structure and capital expenditures of about $294 million in '08, $288 million in 2009.
In the final decision dated January 28, 2008 the commission authorized the revenue increase of $77.8 million for 2008, $20.1 million in 2009 and ROE of 9.4%, a 48.99% equity ratio and largely improved our capital expenditure plans. Given that certain necessary operating costs were not recognized in rates reclamation, we estimate that in the first full year of new rates CL&P will earn 8 to 8.5% regulatory ROE range and because the rate increase became effective February 1, '08 as opposed to January 1st, CL&P will achieve a regulatory ROE close to the 8% in the calendar year 2008.
We're pleased that the commission largely supported our capital structure, capital program, and electric sales forecasts. We're also pleased that the rate relief will provide CL&P with improved year-over-year net income results which in turn will contribute to NU's overall earnings growth.
However, 8% to 8.5% ROE's results of low of our expectations and all reduction and distribution and generation segment guidance for the year. For the balance our distribution companies two of the rate decision that helped 2007 results were not effected until midyear 2007.
As a results it will be positive carry over impact with PSNH and Yankee Gas that should benefit the results in 2008. For the year we expect Yankee Gas to achieve a regulatory ROE towards the mid to higher range of our 9% to 10% ROE target range it appears [ph] go to achieve regulatory ROE towards the lower end in that range at about 9%.
Overall we see improved net income and EPS results for the distribution company compared 2007, achieving midpoint of our guidance will result in a 17% improvement in EPS. However, these companies will continue to meet additional focus to improve longer-term financial returns, particularly as we continue to invest in our infrastructure to improve service the liability in an aging infrastructure.
For transmission, we expect 2008 earnings growth to be driven by investments in Southwest Connecticut as we move to complete our last three major projects there. Growth in the Transmission segment continues to be driven by our investment program, particularly in Southwest Connecticut.
Transmission rate base grew from $1.05 billion at the end of 2006 to $1.49 billion at the end of 2007. Average transmission rate base grew from $800 million in '06 to about 1.2 billion in '07.
We project our yearend rate base was nearly $2.2 billion in 2008. For our Southwest Connecticut project it is also important you remember that being on a cash return on 50% of our investment as we construct the project, equity on the other 50% earned a non-cash return at 12.44% rate authorized by the FERC and that return is capitalizing their cost of the project.
Once project enters service 100% of the investment earned to cash return. Since we are financing our capital program with 45% equity and $700 million capital programs in transmission in 2008, roughly means that we will be investing more than $300 million renewed equity into our segment this year.
Earning our return on that equity will drive our transmission earnings from the $0.53 a share we earned in 2007 to our up of the revised $0.75 to $0.85 per share range for 2008. Results NU parent and other subsidiaries are primarily a function of investing and borrowing activities of the parent.
In 2007 we've had hundreds of millions of dollars cash from the 2006 generation sale that we invested in money market funds for much of the year. As of today, virtually all that cash has been invested as equity in our utility subsidiaries to fund their capital expenditure requirements.
Also the parent company has a $263 million note due 2012 and which is paying 7.25% interest. Those interest payment in the absence of cash to invest are the primary reason we are forecasting the parent will move to a $0.10 to $0.15 per share loss this year.
Lastly, our competitive business has continue to wind down. Our last PJM wholesale contract expires in just over three months leaving us with one wholesale contract under which we supply numerous municipal utilities in York State with power to 2013.
We also own a electrical contracting business that operates throughout the region, it earned about a $3 million last year. This year collectively we expect these businesses to breakeven.
The primary reasons for our low expectations for this segment, is that 2007 results benefited from divestiture activities associated with our remaining businesses in the management of our remaining wholesale contracts. We do not expect similar results in '08 since the business has continued to wind down as we serve our contract and close out divestiture activities.
I'll now turn to our cash flow and 2008 financing needs. Excluding the taxes we pay in 2007 on the 2006 generation spend and excluding repayment of rate reduction volumes, our cash flows were about $450 million in 2007.
We expect that number to be increased to $500 million this year, primarily as a result of approved rate increases and to between $800 million and $850 million by 2012. As we noted at EEI, we project our capital expenditures to total about $1.3 billion 2008 before declining in 2009 as our Southwest Connecticut projects are completed.
We expect to fund our 2008 capital program primarily through internally generated cash and the issuance of short term and long-term debt. As a result, we expect the debt component of our capital structure to increase over the course of the year some from about 56% levels at the end of 2007 to nearly 60% by the end of 2008, right inline with our expectation.
We'll maintain the capital structure of the each utility at approximately 55% debt but will utilize some leverage at the parent and so we issue additional equity which we continue to foresee in 2009. As I mentioned that the EEI, we currently expected to issue of about $500 million of equity over the next five years and about half of that in 2009.
The issuance will be dictated to a great extent step by the ultimate size capital program including the final cost in timing of the NEEWS projects. With the exception of Western Mass Electric, 2008 debt issuance will occur at each of our company of this year including NU parent which has the $150 million debt maturity at June 1st and up to 300 million at CL&P which has the bulk of our capital program.
All told, we expect to issue about $700 million of long-term debt in 2008 including refinancing of the maturing NU parent note and we have already executed forward swap to hedge our exposure to the changes in interest rates. We are also contemplating remarketing $89.25 million of PSNH auction rates, pollution control revenue bonds.
These securities are issued by MBIA. Given recent development in this market PSNH may exercise it rights, turn our the security to 2013.
Although this remarketing will increase PSNH's long-term interest expense it still reserves very attractive long-term cash exempt financing. The cost of this transaction has already been factored into our 2008 guidance.
Additionally, CL&P has a $62 million auction rate pollution control revenue bond issued by AM Best that maybe remarketed later this year as well. When we file our 10-K next week, you will see very similar 5 year forecast for rate-based growth and capital expenditures we showed you at EEI.
They support our above the industry average annual EPS growth rate to 2012. However, because our EPS in 2007 was so strong, but based on which we calculate our 5 year growth rate is higher.
Meaning, although our 5 year EPS expectations are essentially unchanged, the growth rate of 2007 is lower. To expand on this point further, I'll remind you that at the November EEI conference, we announced the long-term growth rate range of 10% to 14 % and increased our 2007 guidance to $1.45 to $1.60.
At that time, we competed our growth rate off of 2007 based level of somewhat less than the midpoint of that range. Now that the year is closed, you recalculate an EPS growth rate of 8% to 11% based of 2007 actual result of $1.59.
I would also add to a lesser degree that the 11% to 8% growth rate was tempered modestly by reduced long-term ROE expectations with CL&P as a result of the recent rate provisions. As we discussed in the past, our growth is based in part on our distribution companies' earning in the 9% to 10% regulatory ROE range.
Given the outcome of this case, we think it's more realistic to expect CL&P to achieve returns towards the lower end of that range. Bigger picture, since we continue to foresee capital expenditures of $6 billion over the 2008 to 2012 timeframe and rate base growth from nearly $5.3 billion at the end of '07 to about $9.3 billion at the end of 2012, our earnings however remains intact, despite the lower compounded annual growth rate.
As a result, we are comfortable with the street consensus forecast in 2011 and 2012 timeframe, assuming we achieve our capital expenditures and rate-based targets and we receive reasonable regulatory treatment. And just as a reminder, as we did in the fall, our $6 billion capital program does not include additional investments that may stem from updates to the new transmission projects, investment into potential CL&P peaking generation, wide scale AMI deployment, further transmission enhancer to act as renewable additional PSNH to renewable generations such as the Northern Wood Power Project, renewable generation in Connecticut, Massachusetts, value derived from increasing conservation of load management initiatives and potential Canadian solution to address the longer term need of our customers.
And finally, as a reminder, we continue to focus on creating long-term shareholder value to get attractive total shareholder return profile. In part, that means we are committed to increasing the annual common stock dividend.
We were pleased to increase our annual dividend in 2007 by nearly 7% and we continue to believe that dividend increases are important part of the overall value proposition of this company going forward, in addition, the type of earnings growth produced by our strategy. Thank you for your time and attention.
Now, Jeff, I'll turn the call back to you.
Jeffrey R. Kotkin - Vice President, Investor Relations
And I'll turn back the call to Christine, just to remind you of how to enter questions. Question And Answer
Operator
Thank you sir. At this time, we would like to begin the question and session of the conference.
[Operator Instructions]
Jeffrey R. Kotkin - Vice President, Investor Relations
Thank you. Our first question today is from Anthony Crowdell from Jefferies.
Anthony?
Anthony Crowdell - Jefferies & Co.
Hi, Jeff. Two questions, I guess the first question is, maybe a year ago, a little over a year ago, we were looking at I guess volumes declining in your service territory and you guys attributed to conservation because of the high commodity costs.
It doesn't seem to be the case anymore. I wonder, if you had any comment on that.
And the second question is, initially I guess we were expecting to see a pickup in the construction numbers for the NEEWS project and I think that the prepared remarks that it got pushed back and I wonder if you have any color on that?
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
Anthony, this is David. Let me just take the first piece of that question and at least kind of factually what we know in 2007 is on the surface, CL&P sales actually did increase 1.7%, some of that was weather driven, about 0.4 was the actual weather normalized growth.
The equivalent numbers for New Hampshire, they actually had about 0.6% growth weather normalized. Western Mass is actually off fractionally by about 0.4%.
So we are actually seeing at least in Connecticut and New Hampshire some modest sales growth, although not inconsistent with our expectations. I think in the range of 0 to about 0.5% is certainly less than historic trend.
Certainly, but my sense is that customers are still responding to higher prices there and we still may not know directionally where these growth rates are going to settle. I would give you some comfort that for the CL&P, sales forecast that was in the rate case, that was based on about 0.3% growth and that's the type of number that embedded in our numbers going forward.
Leon Olivier - Executive Vice President of Operations
Anthony, this is Lee Olivier. One of the things I want to say is ISO New England and we continue to reiterate the fact that the overall NEEWS project including the 115 KV cables will be needed as we go forward, needed to solve reliability issues and needed to help in terms of marketing equities, in terms of vocational marginal pricing power between Connecticut and the region and also to get renewable power down.
And as I said, we have completed the technical assessment of the 155 KV portion that we got favorable vote out of the reliability committee of ISO and I think to key thing here is quite frankly, the Greater Springfield portion of this project of the 345 KV overhead, the 115 KV underground and overhead, are probably the most complex projects we've had ever built and ISO's has to deal even more complex than the Southwest Connecticut projects. One of the things that ISO needs to do is to make sure that these projects meet all the existing and new reliable requirements set forth by the North American Reliability Corporation.
And they need to understand that the operational aspects of the Greater Springfield projects the 115KV projects and how they handle relate with the other projects that we were building. They are looking at the Greater Springfield family of projects, and the 115 KV cables to make sure that they have their liability, operation flexibility and we optimize the cost for those projects.
We've submitted the design that is clearly technically acceptable. They are looking at that design to make sure or to see if there is any other way that can be implemented in a way that meets that criteria and we can optimize the cost of the 115 KV underground cables.
The overall project is we originally had projected it as you know, essentially kind of $1.4 billion between the underground cables and 345 KVs that those overall numbers end up we have not escalated the 345 KV part of the project to the most recent cost estimates in terms of labor and or construction materials and we just thought rather than continue to send out different cost estimates, we would wait to see what the ISO's analysis would say in terms of any design changes on the 115KV and then reforecast the cost of all these projects at one time, we estimate that ISO probably have their analysis done by the June timeframe, at which time we will reforecast all of the projects. I do believe that in their entirety that the overall project price will increase from the $1.4 billion.
Anthony Crowdell - Jefferies & Co.
Okay.
Jeffrey R. Kotkin - Vice President, Investor Relations
Thank you, Anthony. Our next question is from Jonathan Arnold from Merrill Lynch.
Jonathan?
Jonathan Arnold - Merrill Lynch
Good afternoon everyone.
Jeffrey R. Kotkin - Vice President, Investor Relations
Good afternoon.
Jonathan Arnold - Merrill Lynch
Just a quick question on your comments around the expectation of earning an 8.5% ROE CL&P in the first full year and obviously I think this rate deal is effectively a 2 year deal because you have an increase in the second year. But, yes, should we be thinking of as we look out into the second year that you will have an opportunity to work on costs and potentially push that return up or is it more likely to be trending down?
And as a follow-up, at what time would you anticipate that you either it would or could be filing a new case in Connecticut?
Charles W. Shivery - Chairman, President and Chief Executive Officer
Well, I will tell you an easy answer to is that we will not be filing a new case in Connecticut this year, certainly and Jonathan, you should expect as always that we continue to work on the cost structure not only the cost structure of our companies but, additional opportunities for these companies as well. And I think the types of costs that we were not covered to some degree can be mitigated and those are type of things that we are looking at pretty seriously, but there are other types of costs we might describe in this maybe I think there is philosophical differences with the commission about who paid for costs simply cannot be mitigated to any large degree.
And you know the things like, as a classic example might be with the commission did not cover all the companies' director and officer insurance. We are not going to put a cut premium and policies, I mean we will continue to look at that, study that and look at overall limits and the like and be as diligent as we can negotiating terms particularly when we have opportunities to renew our premiums.
But some of those products are going to remain in the structure, but certainly through the course of this year, we will take an opportunity to make sure that we are doing what we can to balance, providing the service to our customers and kind of maximizing our returns and we are hopeful that we can improve return year-over-year. But I'd say, at some point later in 2009, it is possible that we would file for new rates in 2010.
But it's premature to say that now Jonathan, but it certainly won't be in the very near term.
Jonathan Arnold - Merrill Lynch
Thank you very much.
Jeffrey R. Kotkin - Vice President, Investor Relations
Thank you, Jonathan. Our next call is from Micheal Lapides from Goldman Sachs.
Michael?
Michael Lapides - Goldman Sachs
Hey guys, congratulations on a good quarter and a good year. Question, can you give a real high level, I just want to make sure I got this down in my notes correctly.
I'm trying to think about the roster of projects that you are looking at, but that's not in your official CapEx guidance. I mean the CL&P peakers obviously, the transmission up into Canada, which maybe a few years off, but kind of got in the back of the envelope.
What else in my reading off that or kind of major items, $100 million plus items?
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
Okay. Michael, this is David.
Let me kind of rattle through them because I probably went through them fairly quickly. And if you recall from our prior disclosures, typically at EEI we had a fixed slide up on the billboard that say, here is what's in our forecast, here's what's not in our forecast and those our initiatives that we continue to focus on and I think we can continue to advance, but not necessarily with 100% probability, some of the list goes to and you mentioned a couple of them.
Certainly, on the Connecticut peaking generation, we talk about the fact that we will file a proposal for 260 plus megawatts, we haven't put a number on what that would cost. You will see that shortly, but that's one is going to go live very soon.
Lee touched on where we are with NEEWS and we will update that later in the year and you can assign a probability or size to that that's one too, that's sort of right out in front of us. Other things that we talked about, which you include not only near term AMI but really wide scale AMI deployment through all of our states, and there you can put a probability on it.
Connecticut of course, is the most aggressive now as we work through with the pilot. But I think it would be for some years before we get to the point where we are going to be swapping out 1 million meters.
Nevertheless, it holds the potential to be an investment for this corporation. We touched on the future opportunities that's for New Hampshire transmission to reach into our renewable corridors and maybe even for PSNH to build renewables such as wood, biomass and the like.
Both transmission and then additional PSNH generation which are bigger ticket items are not in our forecast as well. I think you will see us increasingly pursue inability to participate in the renewable market in generation in Connecticut and Massachusetts, too early to really develop numbers around that.
But that's something that I think is possibility for us. I think also to the extent that regulators and policy makers are focusing on DSM and conservation, increasing business opportunities there too I think that is already a core competency of ours, if not necessarily a business line, but there that maybe opportunities for us there and you mentioned the longer term Canadian solution.
I think when you stack that up and put some numbers on it, it's a very big number, all with varying degrees of probability, but that probably the less that we would keep you focused on.
Michael Lapides - Goldman Sachs
And what is the process that's going to play out in terms of the New Hampshire transmission and getting approval. Trying to think about just process and timeline and tracking of the New Hampshire transmission, kind of build out?
Leon Olivier - Executive Vice President of Operations
Michael, this is Lee Olivier. Right now, the New Hampshire Public Utility Commission has issued a report on the need for transmission and Chuck indicated some numbers in terms of 400 megawatts to 500 megawatts of additional transfer capacity at costs perhaps up to $100 million to $200 million of transmission investment.
Right now, the decision is over in the legislature, they are looking at essentially a mechanism or methodology of who is going to pay for this. As you know, traditionally, when you interconnect generators to generators, pay for the interconnection and with all renewables anywhere in the country; if you use that approach, then the renewables never get billed.
So, there needs to be a mechanism such that the renewable generators contribute to a tariff and support a transmission, and then the balance would have to be picked up by either the local network service or potentially even through part of the region. So, they are looking at the various adjusting statutes and they will have to make some kind of statutory change, we expect that to happen this year, we will be advocating for that in the legislature.
Michael Lapides - Goldman Sachs
Got it, thank you guys. Much appreciate it on that.
Jeffrey R. Kotkin - Vice President, Investor Relations
Thanks Michael.
Leon Olivier - Executive Vice President of Operations
Sure.
Jeffrey R. Kotkin - Vice President, Investor Relations
Our next question is from Oliver King from Zimmer Lucas [ph]. Oliver?
Unidentified Analyst
Hi guys. I just wanted to clarify on your long-term growth rate, which you guys lowered.
You guys had the 10% to 14% five year growth rate since the beginning of '07, when your '07 guidance was $1.42. Now that you have lowered it to 8% to 11%, but your '07 results were actually around $1.57, would it be fair to say that your 5 year earnings outlook has actually unchanged, despite lower growth rate or would you actually expect lower growth long-term growth rate going forward?
Leon Olivier - Executive Vice President of Operations
To pick up on your kind of mathematical construct there, I think at this point it is fair to say that our long-term growth prospects are driven by the amount of capital we put to work, the agree to which that capital gets into rate base and through which we can earn on it. I mean that's basic process and the amount of capital has not changed.
Our growth process remains the same. I do suggest that longer term, we did a little refining of what we think of steady state ROE is for our CL&P electric jurisdiction and they have vowed that back a little bit, everything else remains in the 9 to 10, but fundamentally, the story is the same and you will see that when we will print the K that will have all of our CapEx and rate based information in front of you.
So with the exception of a little bit of movement around CL&P ROE, this story remains the same, our earnings power is intact.
Unidentified Analyst
Okay, thank you.
Jeffrey R. Kotkin - Vice President, Investor Relations
Thank you, Oliver. Next question is from Ross Fowler from Lehman.
Ross?
Ross Fowler - Lehman Brothers
Good afternoon guys, how are you?
Charles W. Shivery - Chairman, President and Chief Executive Officer
All right.
Leon Olivier - Executive Vice President of Operations
Good afternoon.
Ross Fowler - Lehman Brothers
Just a couple of questions around the New Hampshire transmission. I know the study that they put out, said, we are kind of looking at a year-to-year and a half of study citing an ISO review and then three to five years post that to kind of get this done.
So I was wondering, if that's kind of still in play and that put this into kind of a 2012 timeframe? And then kind of other question around the ISO New England presentation, is the 135 mile DCY from Quebec to New Hampshire and then there is also the 85 mile undersea line from New England to New Hampshire to Boston, you guys haven't really talked about that at all, just wonder if that still in play?
And then what the timing of that stuff is and if it could be kind of out of balance to look at the undersea line in Connecticut and kind of the Middleton and Norwalk line to get a scope of cost per mile or what that might look like?
Leon Olivier - Executive Vice President of Operations
Ross, in terms of the kind of renewables in New Hampshire transmission, there is a strong momentum to try to expedite the construction of those projects and to get them build as soon as we can, but what we are hoping for quite frankly is legislation that would allow us to go forward and then put together a transmission designed and take it through the ISO process, in terms of getting approval, we own essentially right away 115 KV right away that runs up through northern Hampshire and then we own it right away that comes off of the north of the Berlin to Hampshire that actually, it's a 34.5 KV right away that goes into Quebec. Our position is as soon as soon we get legislation, we are prepared to expedite both the design and sighting and the build out of that projects.
So, if you look up the 2012 timeframe, if we get immediate legislative approval sometime this year, we would hope to have it done on or before that time period because on using existing 115 KV lines is not a very sophisticated design, it would be relatively correct to design and build. So, on or before 2012 assuming we get legislative changes we need.
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
And Ross, with respect to your question about the Quebec line, you probably don't have a... having looked at the D.C.
Dayton material, there were a number of folks that presented different opportunities in New England ranging from conceptual to specific projects. We thought it important to begin to inform this discussion and to make this discussion a little more real, to put forth a project that as you pointed out runs a DC line into Quebec to bring the considerable hydro resources from Quebec down and then has at least that as one adjunct to it and under sea line.
You can appreciate there are a lot of moving parts to this, each of the states have their own views on this, the transcription owners have their own particular views on this, and you know, clearly ISO does. And so one of the things we are attempting to do and I said in my remarks that we will hope to have a more refined solution set in place that we could discuss in more detail by the second half of this year.
One of the things that we are trying to do is meet with those interested parties, begin to have informed discussions around what each party is trying to accomplish and then see if we can reach a consensus that begins to bring real solutions to the region. I will say, and we have said this on a number of occasions, this is not just one solution, we are not going to just build...
nobody is going to build just one line to charge everything. But looking at a portfolio approach that which may include accessing additional renewables in Maine or New Hampshire, we are accessing additional generation capabilities in a variety of the Eastern Canadian provinces.
I think we can fashion something that we can reach a consensus opinion on. That process is as you appreciate got a lot of associated aspects to it and we'll continue to keep your apprised, but our hope is that we can put a more refined solution set in space to have people talk concretely about by the second half of this year.
Leon Olivier - Executive Vice President of Operations
Ross, Is there a question in regards to underwater cables that would be cost per mile per underwater DC cable?
Ross Fowler - Lehman Brothers
Yes, I was just trying to get like a scope, I know that you guys have gone Norwalk to Northport and that's like a 11 miles for $72 million and then Middleton and Norwalk is 69 miles for about $1 billion. I know this difference is in geography and probably labor of Connecticut to New Hampshire.
But, I was just trying to scope out what this might look like down the road based on a darker mile kind of cost picture?
Leon Olivier - Executive Vice President of Operations
If you are looking like underwater lines, I think underwater DC lines is an example, you are probably talking a good number is about $10 million a mile for a DC mine underwater and if you are looking overhead lines, depending on what the sighting criteria is in each state and Connecticut is probably the strictest and so has the highest pass. If you do overhead differences like overhead 345 KV lines there, they're up around $4 million a mile with EMF mitigation technology and so forth.
So, it kind of depends on the technology on the state sighting criteria. Now, all of the numbers we have given with NEEWS as in...
you given an example with the exception of the underground 115 KV cables, all of those 345 KV numbers have no undergrounding built into that. So, to the extent that either in Connecticut or Massachusetts that require undergrounding then whatever the mileage is you multiply times essentially about 4 in terms of that task.
Ross Fowler - Lehman Brothers
Okay, that makes sense. Thank you very much.
Leon Olivier - Executive Vice President of Operations
Okay.
Jeffrey R. Kotkin - Vice President, Investor Relations
All right, thank you Ross. Our next question is from Maury May from Soliel [ph].
Maury?
Unidentified Analyst
Yes, good afternoon gentlemen.
Leon Olivier - Executive Vice President of Operations
Good afternoon.
Unidentified Analyst
I have a question again on the new growth rate, if I recall the old growth rate of 10% to 14% was backend loaded and that the growth in the early years of the 5 years was faster than the final couple of years, is that also true of the new 8% to 11% made?
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
Maury its David. I think it's true if you look at where we are going kind of '08 midpoint over 2007 actual effective gain of 12% or 13% growth.
I think when you kind of look through 09, 2010 kind of model out with different shape and they probably flattens out a little bit and then at the very end the last tail here you got to note a little pop. So, its looking...
it's a little chunkier year-by-year than say last time, last year it was. Good growth in 2007, big growth in 2008 and kind of a bit of U shaped or chewing off some of that front end, as we sort of succeeded out in 2007.
Still got a kind of U shape but the last year too is a bigger increase. So, you got to sort of model out year by year.
Unidentified Analyst
Okay, my second question has to do with the parent re-financing that you planned for June 1st. If I recall, you are refinancing $150 million of 3.3% debt, and what do you plan to refinance, exactly that amount or a higher amount and if you have to do it today what would be the cost, to you all?
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
We are studying that now. And those are the right numbers $150 million 3.3%, roughly five years ago.
So, we are studying exactly how much it will be that number plus or minus, don't expect to see a $500 million offering anytime soon. We did already not only for NU parent but we did for all of our...
based for all our debt exposure, lock-in interest rates already, some fives and some tens through some forward ratings starting to ops as I mentioned. So at this point it depends on what's happening in the credits spread markets as we get into that timeframe.
But clearly it's going to depend on where we are on the maturity spectrum and so did ten year deal and that ten year its trading at 380. You can guess when a new parent take over right now, it might be 225 given their rating.
But I've already got the underlying interest rate for you lock-in. So its still developing I'd say 5 to 10 year maturity, I'd say generally is going to be that 150 and generally around 225 over the that year.
Unidentified Analyst
Okay. Alright thank you very much.
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
You are welcome.
Operator
Next question is from Paul Patterson from Glenrock. Paul?
Paul Patterson - Glenrock Associates
Good afternoon guys, I just want to follow up on Jonathan Arnold's question on the ROE. We are looking at the ROE that you guys are projecting business versus what you allowed.
You mentioned that there was certain class or clause that you guys simply disagree with the commission in terms of what applicable to CL&P is what it sound like to me. I guess I'm wondering here is an how much of the difference in the ROE, I mean it is possible to quantify is associated with items that they simply don't feel should be to be expensed by CL&P and in cost allocations what had you from the parent work, have you mentioned in your insurance versus just maybe expectation of sales growth or something that's different.
Just elaborate a little bit more in terms of what's causing the differential in the earned ROE versus AL?
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
Sure. So there are probably two types of costs that I will characterized.
The first cost is were we may have a different view of what our rate year expense will be. They think differently but fully recovered whatever they believe that rate is -- And the second bucket is maybe a sort of philosophically cost that they feel should be borne in part by our shareholders, as opposed to exclusively in a rate pair account.
So, some of those costs for example might be some of our benefit programs such as 401(k) and they are quite expressed in their rate or is same as some of those costs should be borne by our shareholders. Also, things like for...
incentive compensation for our executives, those costs should be borne by our shareholders. So, some of those type of costs probably, philosophically the commission may continually will that they are not recoverable.
Even if you actually do bear that expense level. And see that's difference to say that the first bucket of costs that maybe things like storm expense or rent expense or expense to cover your vehicles and your fleet, in your auto insurance and the like, where you're just saying they might say your test here is not reflective of what your rate year expensive level might be.
And they are just kind of a difference. If you do not think philosophically you shouldn't get them covered.
But to your second point, when you look to those items where they may rule for some period of time that your shareholders should cover some of those costs P&L insurance, 401(k), executive incentives, there might be worth 30 or 40 basis point after that 9.4 we just can't get to.
Paul Patterson - Glenrock Associates
Excellent. Okay, that's great.
And then just a follow-up on Jonathan's question about the 2009. Was your answer and I'm sorry to be not clear on this but, I wasn't clear whether the answer was that, you weren't sure what the 2009 or whether it will be improved or not or whether...
just what exactly was your expectations if you had one of those?
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
Okay, first off my stock answer is we are not giving 2009 guidance, I don't mean to flip about it
Paul Patterson - Glenrock Associates
Sure.
David R. McHale - Senior Vice President, Chief Financial Officer and Principal Accounting Officer
That that's not our precise study period right now. We know we got about $20 million of revenues coming in to CL&P from the rate case and what we are doing now and will do over the course of this spring in particular as we kind of drive toward deeper in the year preparing '09 guidance is sort of think through what costs were recovered, back to that philosophical issue of who is going to recover these costs?
What is their appropriate expense structure for this organization and what is the outcome, what is this regulatory ROE outcome? All that work sort of, is in motion, Paul.
Paul Patterson - Glenrock Associates
Okay great. Thanks a lot guys.
Charles W. Shivery - Chairman, President and Chief Executive Officer
Thank you, Paul. we don't have any more questions now so.
I just want to thank you all for joining us. If you have any follow-up questions, please give us a call this afternoon or tomorrow and we will talk to you soon.
Thank you very much.