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How One Utility Outshines

Travis Miller

Travis Miller: Hi. My name is Travis Miller. I'm an equity analyst at Morningstar. It's my pleasure to introduce Jim Judge, CFO from NSTAR. NSTAR is a Boston-based utility that we think is well positioned to benefit from changing demand and a very constructive regulatory structure that produces a solid dividend for investors. Jim, thanks for being with me.

Jim Judge: Thank you. Good morning, Travis.

Miller: Let's start of and talk about a trend that we've seen over the last couple of quarters in the utility space. Volumes are down. The economy is weak. Weather was unfavorable in most of the eastern half of the U.S. What's happening with volumes on your side?

Judge: Actually, to get a fuller perspective, I'd go back more than a few quarters. And if you look at the last two years nationally, electric sales are down between 7% to 8%. And we, up in the greater Boston area at NSTAR have fared much better than that.

Last year, our sales were actually flat while the industry was down 3% to 4%. And this year, our sales are down 3.7%, but a good portion of that has to do with the weather that we experienced. June and July were the mildest June and July in over 100 years. In fact, cooling degree days were off 40% from what we usually see in July, so the air conditioning load wasn't there.

So while there has been demand destruction, our region seems to have held up much better, and I think it's really a credit or a function of the stable customer base that we have in our territory.

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Miller: With that top-line pressure, what have you guys done on the cost side, particularly operating costs?

Judge: We've done a wonderful job of keeping our O&M costs flat for approximately five years now, and there's a combination of factors. We've taken advantage of technology. We've fully automated our meter route so that we don't have employees walking meter routes anymore. Rather, they're picked up remotely by a drive-by vehicle. So that has reduced O&M.

We have implemented a new IVR system--Integrated Voice Response--which has allowed a lot of our phone call traffic to be handled by the individual themselves that made the call.

We have one of the most extensive electronic billing customer bases in the region. Nearly a quarter of a million customers pay through our e-billing system. That, too, has reduced our cost.

So the technology has been one piece of the story. And the other piece has just been good belt-tightening across the company. Discretionary spending, we've tightened down on. Given the sales decline this year, we have a job freeze on. We've cut out some of the items, like advertising, which we have spent dollars on in the past. Consultants are lower.

We've pushed back on vendors. We have an A+ credit rating. We have the strongest credit in the entire utility industry. And so vendors appreciate doing business with a company like NSTAR. And we've asked them to sharpen their pencil and reduce their prices for the work that they do.

So really a broad series of initiatives that have helped us achieve the bottom-line growth that we continue to put up.

Miller: We also think you guys have one of the most favorable regulatory structures. When we look across the utility industry, having the set rate structures and the seven-year agreement that you guys have, the certainty through 2012, and frankly one of the highest ROEs that are allowed in the industry.

Tell me about what happens, then, in 2012. How do you guys continue to have these constructive regulatory relationships?

Judge: I think the key there is to look back at the past at what the company has been able to achieve. And while we have a seven-year rate deal in place now, if you look back prior to that, there was a four-year rate deal. Prior to that there was a three-year rate deal. In fact, we have had 23 consecutive years of rate agreements.

We were able to reach out to the customer groups, to the policymakers, and put in place a multi-year rate deal that allows us to basically be in control of our own destiny. We know what the revenue level is that we will get going forward. We need to manage the costs efficiently underneath that revenue level to produce earnings growth.

That model has worked very well for us. I'm optimistic that at the end of the seven-year settlement, there will be yet another one that we will be able to put in place.

Miller: A lot of utility investors want to know about the dividends. You guys yield right now over 4%. You've talked about the growth that is available, the certainty of earnings. How does that translate into dividend yield and dividend growth?

Judge: We have among the longest track records in the New York Stock Exchange. We have been paying consecutive dividends since 1887. So there's quite a commitment to the dividend and to dividend growth. In fact, every year for the last 11 years we have been able to increase the dividend for shareholders.

It's a very important part of the return to our shareholder base. We realize that. I know that our shareholders appreciate that. In fact, we will be looking at the dividend level in two weeks to set next year's level. Our board will be approving it.

So we continue to grow dividends in-line with earnings. And if you look at our payout, it's a conservative 64%, so there's still room to grow the dividend going forward.

Miller: Thank you very much, Jim. I appreciate you being here participating in our stocks forum.

Judge: Thank you, Travis.