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Rating Agency Meetings New York March 19, 2007. Energy / Growth / Leadership. Agenda For Today. 2006 implementation of strategic plan 2006 financial performance Transmission business Distribution and PSNH generation business Rate cases Financial forecast.
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Rating Agency Meetings New York March 19, 2007 Energy / Growth / Leadership
Agenda For Today • 2006 implementation of strategic plan • 2006 financial performance • Transmission business • Distribution and PSNH generation business • Rate cases • Financial forecast
We Have Transformed Ourselves Into A Focused Regulated Utility Year End 2005 Today Northeast Utilities Northeast Utilities Regulated Competitive CL&P Yankee Gas D T Electric Distribution Electric Transmission Retail Wholesale WMECO T D Regulated Generation Generation Services PSNH Gas Distribution D T G
Remaining Commitments In The Wholesale Businesses • PJM Wholesale: 5 sales contracts, 4 of which expire in May 2007 • NYMPA Wholesale: 1 sales contract which expires in 2013 • Early years hedged • Wholesale contracts marked at 12/31/06 at negative $126.5 million • New England: In-the-money generation entitlement contract expires 12/31/12 • Estimated positive value at 12/31/06 of about $100 million • Negative impact on cash flow expected to be $40 million in 2007 and $27 million in 2008, down from $100 million in 2006
Strategic Plan – Regulated Businesses 2006 Goal2006 Results Complete Bethel-Norwalk Done Complete Northern Wood Done Begin remaining SW CT projects Done File/settle PSNH, WMECO, Yankee Gas cases Done Develop CL&P rate case strategy In process Complete FERC ROE case Done Merge CL&P, Yankee Gas management Done Better align organization to support 100% In process regulated companies
Enterprise Risk Management – Status Update ERMOrganization Structure Board of Trustees • Enterprise Risk Management is in its second year of implementation as a corporate oversight function • Corporate level Enterprise Risk Management Group works directly with the businesses and corporate functions • Accountability for risk remains with the businesses • Regular reports to the Board of Trustees on strategic and operational risks • Fully functioning Risk and Capital Committee which integrates risk with capital expenditure decisions • Responsible for establishment and oversight of ERM policies and procedures • Executive management membership • ERM principles integrated into strategic planning and budgeting processes with strategic and operating plans “risk rated” Chief Executive Officer Chair Risk & Capital Committee Chief Financial Officer Director Corporate ERM Utility Group Risk Controller Executive Vice President Operations Transmission Risk Controller Corporate Shared Services Risk Controller Senior Risk Analyst
2006 Earnings $81.7* $115.8 In Millions Distribution and Regulated Generation Transmission Parent/Other Competitive *$74 million from PLR and $7.7 million from competitive generation sale
Distribution/Regulated Generation Results In Millions $81.7* $65.9 CL&P PSNH WMECO Yankee Gas *$74 million from PLR and $7.7 million from competitive generation sale
Cash Sources And Uses In 2006 (in millions) Major Sources Major Uses
Improved Balance Sheet (in millions) 9/30/05 12/31/06 36.4% 47.6% 50.4% 61.5% 2.1% 2.0%
Share Price Up 43% In 2006 Enhances Access To Capital Share Price Chart $425 million equity issuance November 2005 – March 15, 2007
Transmission: A Very Successful 2006 • Earnings up 45% • Bethel-Norwalk completed ahead of schedule, below budget • Other SW Connecticut projects commenced • Several other projects completed successfully (Killingly substation 10% below budget) • Favorable FERC decisions on generic transmission incentives, New England ROE • Strong initial results from NERC readiness audit • Initial planning under way on New England East West Solution (NEEWS)
The Next Five Years: Transmission Capital Expenditures Historic Forecast $1,062 Million Up To $2.5 Billion $1.1 Billion of major CT projects in 2007-2011 forecast period; $1.65 billion in total $ Millions NEEWS family of projects estimated at $710 million during the 2007-2011 forecast period • The New England East-West Solution (NEEWS) family of projects is growing in scope and definition. • Over the next three years, a high level of capital spending is associated with projects that have already received siting approval.
Projected Transmission Year End Rate Base Transmission Rate Base 2006-2011 CAGR of 23% $ Millions * * * *Reflects FERC approved 50% CWIP for southwest CT projects
Four Major SW Connecticut Projects – A $1.65 Billion Investment SWCT improvements have been a top priority in each of ISO-NE’s last four regional transmission expansion plans. Our four major projects there total about $1.65 billion in investment. COMPLETE Bethel-Norwalk 345 kV Underground & Overhead $350 Million • 21 miles 345kV (56% underground) • 10 miles 115kV (100% underground) • Completed October 2006 at a cost of $340 million 50% of CT Load Middletown-Norwalk 345 kV Underground & Overhead $1,047 Million (NU Share) Glenbrook Cables 115 kV underground $183 Million Long Island Cable 138 kV cross sound $72 Million (NU share) • 69 miles 345kV (35% underground) • 57 miles 115kV (1% underground) • Joint project with United Illuminating • Projected in-service date: 2009 • Construction under way, 16% complete • 9 miles 115kV underground • Projected in-service date: 2008 • Under contract – construction under way, 20% complete • 11 miles 138kV submarine cable • Joint project with LIPA • Projected in-service date: 2008 • Under contract – cable being manufactured
We Have Selected The Preferred Routes For NEEWS The four components, identified to date, are: A Springfield Reliability Component An Interstate Reliability Component A Rhode Island Reliability Component A CT East-West Reliability Component Total Planning Grade Estimate (NU share): $1.1 - $1.4 Billion Post-NEEWS Import Capability into CT is expected to grow to 3600 MW
Rate Case Status: Transmission • NU’s FERC-approved transmission tariffs fully track all transmission costs • We have forward-looking rates, adjusted every six months, with an annual true-up provision to ensure timely recovery of transmission investment • FERC decision on New England transmission ROE issued on October 31, 2006 • Base ROE set at 10.2% for the period 2/1/2005 through 10/31/2006 and 10.9% beyond that • Incentive adders include: • 50 basis points for joining an RTO • 100 basis points for new transmission identified by ISO-NE within its regional system planning process • November 30th request for rehearing by New England transmission owners – apparent 30 basis point error in base ROE • Other parties seeking to reduce incentive ROEs
Transmission - Retail • CL&P • Legislatively mandated tracker reset semi-annually • WMECO • Regulatory tracker reset annually • PSNH • Regulatory tracker included in rate case settlement • Effective 7/1/06 • Impact on rates beginning 7/1/07 • Will reset annually beginning 1/1/08
Projected Distribution, Regulated Generation Capital Expenditures $ Millions
Projected Distribution And Regulated Generation Year End Rate Base Projected Distribution & Generation Rate Base CAGR of 7% $ Millions
Current Major Distribution/Regulated Generation Projects Mostly Complete • Yankee Gas’s 1.2 Bcf liquid natural gas production facility in Waterbury, CT • $108 million cost • About 90 percent complete • Scheduled to be in service for 2007-2008 heating season • Will enhance reliability, help insulate customers from price volatility • Conversion of PSNH’s 50 MW Schiller unit in Portsmouth, NH from coal to wood • $74 million cost • Commenced operation in December • Enhances fuel diversity, reduces sulfur, NOx, mercury emissions
CL&P Retail Rate Case To Be Filed This Summer • Expect to under-earn ROE significantly in 2007 due to lack of sales growth, higher costs, modest rate increase • Growing capital needs in distribution business to maintain reliability • Regulators generally support reliability initiatives • Working on strategies to blunt impact of rate case
CL&P Has Significant Cost Components Which Are Tracked And Reconciled For Timely Recovery • Power supplies bid on a staggered schedule • GSC set to reflect costs • Congestion costs passed through FMCC • Transmission projects helping to contain them • Transmission charge reset semi-annually • Legislative mandate • Majority of stranded costs recovered, except for RRBs which mature in 2010, decommissioning of Yankee nuclear units, and Independent Power Producer contracts
Recovery Of Generation And Reliability Costs In 2007 By Rate Component Notes: (a) Definitions of “other charges” are provided in the glossary on pages 48 - 51 BFMCC – Bypassable Federally Mandated Congestion Charge DS – Default Service Recovery Mechanism ES – Energy Service Charge GSC – Generation Service Charge NBFMCC – Nonbypassable Federally Mandated Congestion Charge TC – Transition Charge TT – Transmission Tracker TCAM – Transmission Cost Adjustment Mechanism
CL&P Costs Being Recovered In A Timely Manner ¢ Notes: C&LM – Conservation and Loan Management CTA – Competitive Transition Assessment FMCC – Federally Mandated Congestion Charge GSC – Generation Services Charge SBC – System Benefits Charge
Peak Load Growing Much Faster Than Overall Consumption PSNH Residential Use Per Customer and Summer Peak Weather Normalized CL&P Residential Use Per Customer and Summer Peak Weather Normalized • Residential customer growth remains steady, at roughly the rate of housing growth • Residential use per customer has flattened in response to price induced conservation • Growth in peak demand outpaces growth in use per customers, as comfort during extreme weather appears to outweigh cost Load factors continue to fall as peak loads rise
PSNH Bills Much Lower Despite July T&D Rate Increase 0.06 0.06 January 2006 Total 15.75 cents/kwh July 2007 Total 13.85 cents/kwh
PSNH Distribution Rate Case Settlement • Joint settlement with NHPUC staff, Consumer Advocate filed 2/26/07 • Proposed effective date of 7/1/07 • Key elements • 9.67% ROE, 7.55% overall cost of capital • Transmission tracker to be reset annually • $37.7 million estimated annualized increase ($26.45 million for distribution; $11.24 million for transmission) in addition to $24.5 million increase effective 7/1/06 • Incremental increase includes: • $8.76 million, 12-month increase to recoup revenues not collected between 7/1/06 and 6/30/07 • $9.2 million related to storm costs to be recovered over three years • Generation ROE of 9.62% unaffected
Additional Factors Lowering PSNH Costs IPP Contracts Expiring: Project 2006 Payments 2006 MWH Purchases Cents/kwh Expiration Bethlehem $21.1 million 123,499 $0.1709 12/18/06 Bridgewater $32.4 million 130,794 $0.2479 8/05/07 Hemphill $12.8 million 96,656 $0.1322 10/26/06 Tamworth $23.2 million169,781$0.1367 3/31/08 $89.5 million 520,730 $0.1719 @ $80/mwh replacement energy cost, annual energy cost savings when all rate orders end will be about $46 million = rate cut of 0.56 cents/kwh RRBs: PSNH RRB-2 matures 2/1/08, annual savings - $10 million
PSNH Costs Being Recovered In A Timely Manner ¢ Notes: C&LM – Conservation and Loan Management SCRC – Stranded Cost Recovery Charge SBC – System Benefits Charge
Yankee Gas Rate Case Highlights • Net increase of $37 million (8.4%) • Base rate increase of $68 million • Lower pipeline, commodity charges due to LNG facility of $26.5 million • Savings from expected property tax abatement of $4 million • Expected effective date of July 1, 2007 • Most recent increase January 1, 2005 • $68 million base rate increase driven by: • Improved returns ($17.5 million)* • Higher rate base ($14 million)* • Amortization of deferred hardship and environmental remediation costs ($11 million) • Higher O&M ($11 million, including $3 million for LNG facility electricity)* • Higher depreciation over July 1, 2005 – June 30, 2006 test year ($9 million)* • Higher property and other taxed ($6 million)* *Partially related to LNG facility – Overall total related to LNG facility about $20 million
Current Yankee Gas Rate Case Schedule Consumer Counsel testimony due Statutory deadline for decision Draft decision 2006 2007 December 29 May 15 June 27 March 13 March 6 April 19 May 28 July 1 Increase expected to be effective Final decision Evidentiary hearings start Briefs due Rate case filed
Yankee Gas Rate Base and Cap Ex Projected Year-End Rate Base Projected Distribution Capital Expenditures $ Millions $ Millions
WMECO Rate Settlement • Approved by DTE • Rates effective January 1, 2007 • $1 million distribution increase, plus pension, other trackers, higher energy costs resulted in 17.8% increase • $3 million distribution increase to be effective January 1, 2008 • Expect distribution ROE to remain in 9-10% range through 2008 • Next rate case to be filed around 7/1/08
WMECO Costs Being Recovered In A Timely Manner ¢ Notes: C&LM – Conservation and Loan Management PPAM – Pension/PBOP Adjustment Mechanism RAAC – Residential Assistance Adjustment Clause (a) Rate changes every six months except for large commercial and industrial, which changes every three months
Changes In Forecast Assumptions From 2006 2006 2007 • Sale of generation for actual $1.34 billion • No additional equity • FFO in 2007-2011 of $2.9 billion after $428 million of tax payments on generation sale • Net income of $1.65 billion from 2007-2011 • Capex of $4.79 billion from 2007-2011 • Higher distribution at CL&P • Higher distribution, generation at PSNH • Higher transmission at WMECO • Lower at Yankee • Sale of generation for projected $900 million • Issuance of additional equity in 2008 and 2010 • FFO in 2006-2010 of $2.4 billion after $220 million of tax payments on generation sale • Net income of $1.22 billion from 2006-2010 • Capex of $4.34 billion from 2006-2010
2010 Balance Sheet 2007 Forecast 2006 Forecast 40.6% 58.0% 40.5% 58.2% 1.3% 1.4%
NU’s Transformation Producing Solid Results, Prospects • Strategic plan elements announced one year ago are on or ahead of schedule • Financial flexibility is significantly improved • Financial performance consistent with projections • Transmission business is growing rapidly to meet customer needs • Distribution results expected to improve as reasonable rate case outcomes are implemented • Additional infrastructure needs being identified
Glossary Black Start Charges billed by ISO and paid to generators to maintain the capability to restart without an outside supply of electricity. D&D Decontamination and decommissioning expense paid to the federal government for the clean-up of nuclear fuel processing sites. EIA Costs associated with the implementation of measures in support of Connecticut’s Energy Independence Act. ISO S-1 ISO administrative and general expense relating to scheduling and dispatch charges.
Glossary ISO S-2 ISO administrative and general expense relating to energy administration. ISO S-3 ISO administrative and general expense relating to reliability administration. Load Response Charges billed by ISO and paid to load response program participants for reducing their peak electricity demand. Misc. NEPOOL Misc. NEPOOL expense includes other charges billed by the ISO such as Generation Information System costs, credit insurance charges, and allocations of participants late payments.
Glossary RMR [Reliability Fixed charges per the cost of service Must Run] agreements approved by FERC for generating units in constrained areas to ensure NEPOOL system reliability and stability, net of any revenues derived when the units are running. SCR [Special Charges billed by ISO to pay generators that Constrained run out of merit for transmission voltage Resource] reliability purposes. SW CT Charges billed by ISO and paid to supply Energy resources and demand responses for improving Resources reliability in Southwest CT.