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| CV > SEC Filings for CV > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Forward-looking statements - Statements contained in this report that are not historical fact are forward-looking statements within the meaning of the 'safe-harbor' provisions of the Private Securities Litigation Reform Act of 1995. Whenever used in this report, the words "estimate," "expect," "believe," or similar expressions are intended to identify such forward-looking statements. Forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Actual results will depend upon, among other things:
§ the actions of regulatory bodies with respect to allowed
rates of return, continued recovery of regulatory assets
and application of alternative regulation;
§ liquidity risks;
§ performance and continued operation of the Vermont
Yankee nuclear power plant;
§ changes in the cost or availability of capital;
§ our ability to replace or renegotiate our long-term
power supply contracts;
§ effects of and changes in local, national and worldwide
economic conditions;
§ effects of and changes in weather;
§ volatility in wholesale power markets;
§ our ability to maintain or improve our current credit
ratings;
§ the operations of ISO-New England;
§ changes in financial or regulatory accounting principles
or policies imposed by governing bodies;
§ capital market conditions, including price risk due to
marketable securities held as investments in trust for
nuclear decommissioning, pension and postretirement
medical plans;
§ changes in the levels and timing of capital
expenditures, including our discretionary future
investments in Transco;
§ the performance of other parties, including Vermont
utilities and Transco, in joint projects;
§ our ability to successfully manage a number of projects
involving new and evolving technology;
§ our ability to replace a mature workforce and retain
qualified, skilled and experienced personnel; and
§ other presently unknown or unforeseen factors.
We cannot predict the outcome of any of these matters; accordingly, there can be no assurance as to actual results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
EXECUTIVE SUMMARY
Our core business is the Vermont electric utility business. The rates we charge
for retail electricity sales are regulated by the Vermont Public Service Board
("PSB"). Fair regulatory treatment is fundamental to maintaining our financial
stability. Rates must be set at levels to recover costs, including a market rate
of return to equity and debt holders, in order to attract capital. As discussed
under the heading Retail Rates and Alternative Regulation below, the PSB
approved the alternative regulation plan that we proposed in August 2007, with
modifications. The implementation of this plan will provide more timely
adjustments to power, operating and maintenance costs, which will better serve
the interests of customers and shareholders.
Our consolidated earnings for the third quarter of 2009 were $6.2 million, or 52 cents per diluted share of common stock, and $18.6 million, or $1.57 per diluted share of common stock, for the first nine months. This compares to consolidated earnings of $6.5 million, or 61 cents per diluted share of common stock, for the third quarter and $16.4 million, or $1.55 per diluted share of common stock, for the first nine months of 2008. The primary drivers of the year-over-year earnings variance for the third quarter and first nine months are described in Results of Operations below.
We continue to focus on key strategic financial initiatives including: restoring our corporate credit rating to investment-grade; ensuring that our retail rates are set at levels to recover our costs of service; evaluating financing options to support current and future working capital needs; planning for replacement power when long-term power contracts begin to expire in 2012; working to support the State of Vermont's e-state initiative, including both broadband and smart grid components; and implementing our asset management plan to ensure we continue to provide safe, reliable service to our customers at the lowest possible cost.
RETAIL RATES AND ALTERNATIVE REGULATION
Retail Rates Our retail rates are approved by the PSB after considering the
recommendations of Vermont's consumer advocate, the Vermont Department of Public
Service ("DPS"). Fair regulatory treatment is fundamental to maintaining our
financial stability. Rates must be set at levels to recover costs, including a
market rate of return to equity and debt holders, in order to attract capital.
On September 30, 2008, the PSB issued an order approving, with modifications, the alternative regulation plan proposal that we submitted in August 2007. The plan became effective on November 1, 2008. It expires on December 31, 2011, but we have an option to petition for an extension beyond 2011. The plan replaces the traditional ratemaking process and allows for quarterly rate adjustments to reflect changes in power supply and transmission-by-others costs ("PCAM adjustment"); annual base rate adjustments to reflect changing costs; and annual rate adjustments to reflect changes, within predetermined limits, from the allowed earnings level. Under the plan, the allowed return on equity will be adjusted annually to reflect one-half of the change in the yield on the 10-year Treasury note as measured over the last 20 trading days prior to October 15 of each year. The earnings sharing adjustment mechanism ("ESAM") within the plan provides for the return on equity of the regulated portion of our business to fall between 75 basis points above or below the allowed return on equity before any adjustment is made. If the actual return on equity of the regulated portion of our business exceeds 75 basis points above the allowed return, the excess amount is returned to ratepayers in a future period. If the actual return on equity of our regulated business falls between 75 and 100 basis points below the allowed return on equity, the shortfall is shared equally between shareholders and ratepayers. Any earnings shortfall in excess of 100 basis points below the allowed return on equity is recovered from ratepayers. These adjustments are made at the end of each fiscal year.
The PCAM and ESAM adjustments are not subject to PSB suspension, but the PSB may open an investigation and, to the extent it finds, after notice and hearing, that a calculation in the adjustments was inaccurate or reflects costs inappropriate for inclusion in rates, it may require a modification of the associated adjustments to the extent necessary to correct the deficiencies.
On October 31, 2008, we submitted a base rate filing for the rate year commencing January 1, 2009 that reflected a 0.33 percent increase in retail rates. The result of the return on equity adjustment for 2009, in accordance with the plan, was a reduction of 0.44 percent, resulting in an allowed return on equity for 2009 of 9.77 percent. On November 17, 2008, the DPS filed a request for suspension and investigation of our filing. Citing concerns about staffing levels and inadequate supporting documentation for some proposed rate base additions, the DPS recommended a 0.43 percent rate decrease.
On December 17, 2008, we filed a Memorandum of Understanding with the PSB setting forth agreements that we reached with the DPS regarding the PSB's investigation into our 2009 retail rates. Pursuant to the Memorandum of Understanding, we agreed to leave rates unchanged, with no increase or decrease, and that we and the DPS would request the PSB to open a docket to resolve the DPS's concerns regarding our level of staffing. On February 13, 2009, the PSB approved the Memorandum of Understanding, and ordered the rate investigation closed.
On February 2, 2009, we filed a motion with the PSB requesting to defer the incremental 2008 storm costs through our alternative regulation plan and collect them in rates through the ESAM over 12 months beginning on July 1, 2009. On February 3, 2009, the DPS filed a letter supporting our motion and on February 12, 2009, the PSB approved the request. The amount of the deferral, based on actual costs, was $3.2 million.
On May 1, 2009, we filed an ESAM report, including supporting documentation, with the PSB requesting that rates be increased 1.15 percent for 12 months beginning with bills rendered July 1, 2009 to recover the $3.2 million of incremental 2008 storm costs. On June 15, 2009, the DPS recommended that the ESAM report be approved as filed. On June 30, 2009, the PSB accepted the DPS recommendation and approved the filing. The rate increase has been implemented as proposed.
The first quarter 2009 PCAM adjustment was calculated to be an over-collection of $0.6 million and was recorded as a current liability. On May 1, 2009, we filed a PCAM report, including supporting documentation, with the PSB identifying the over-collection. On June 15, 2009, the DPS recommended the PCAM report be approved as filed. On June 30, 2009, the PSB accepted the DPS recommendation and approved the filing. The over-collection was returned to customers over three months ending September 30, 2009.
The second quarter 2009 PCAM adjustment was calculated to be an over-collection of $0.5 million and was recorded as a current liability at June 30, 2009. On July 30, 2009, we filed a PCAM report, including supporting documentation, with the PSB outlining the over-collection. On September 4, 2009, the DPS recommended the PCAM report be approved as filed. On September 28, 2009, the PSB accepted the DPS recommendation and approved the filing. The over-collection will be returned to customers over three months beginning October 1, 2009.
The third quarter 2009 PCAM adjustment was calculated to be an over-collection of $0.6 million and is recorded as a current liability at September 30, 2009. On October 30, 2009, we filed a PCAM report, including supporting documentation, with the PSB outlining the over-collection. The over-collection will be returned to customers over three months beginning January 1, 2010.
On February 13, 2009, the PSB opened an investigation into the staffing levels of the company as requested by us and the DPS. On March 25, 2009, the PSB convened a prehearing conference where we and the DPS agreed to a procedural schedule. We and the DPS further agreed that the scope of the technical hearings could be narrowed to devising a methodology for deriving productivity measures that would be tracked over time. The parties did not agree, however, as to what the substantive elements of that tracking methodology should be. Accordingly, the PSB ordered that the purpose of hearings in this proceeding would be to resolve this disagreement about the makeup of the productivity tracking methodology. Technical hearings were held in June 2009 and legal briefs were filed in July 2009.
The PSB issued its Order in the case on August 20, 2009. In its decision, the board made no determination that we are over-staffed. We are allowed to increase our 2010 non-power-cost cap by $189,000, representing the average cost of an additional 2.25 employees beyond the number currently allowed in rates. As recommended by the 2008 business process review report, the PSB order requires us to undertake a comprehensive review of our organizational structure, staffing levels and costs to determine the appropriate structure and number of staff we should employ at ratepayer expense. We were also invited to propose a means within the context of the alternative regulation plan to recover from ratepayers the prudently incurred costs of performing the review. We are in the process of preparing a Request for Proposal for a management consultant to perform the review. We are in talks with the DPS regarding a possible settlement of the docket. The outcome of these settlement talks cannot be predicted at this time.
On October 30, 2009, we submitted a base rate filing for the rate year commencing January 1, 2010 that reflects an increase in base rates of $16.6 million or a 5.91 percent increase in retail rates. Under our alternative regulation plan, the annual change in the non-power costs, as reflected in our base rate filing, is limited to any increase in the US Consumer Price Index for the northeast, less a 1 percent productivity adjustment. The non-power costs associated with the implementation of our Asset Management Plan and our SmartPower project are excluded from the non-power cost cap. Our 2010 non-power costs exceeded the non-power cost cap by approximately $1 million and these costs ("disallowed costs") will not be included in our 2010 non-power base rates. These disallowed costs will be factored into the earnings sharing adjustment mechanism when it is calculated after the close of rate year 2010. The allowed rate of return for 2010, calculated in accordance with the plan, will be 9.59 percent.
The base rate filing is subject to PSB suspension and review. If the PSB elects to suspend the filing then any PSB decision in the proceeding resulting from the suspension shall be issued on or before April 30, 2010, with rates effective on a bills-rendered basis May 1, 2010. If there is no PSB suspension of the filing, the rate increase will take effect on a bills-rendered basis January 1, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows At September 30, 2009, we had cash and cash equivalents of $10.3
million compared to $10.7 million at September 30, 2008. The primary components
of cash flows from operating, investing and financing activities for both
periods are discussed in more detail below.
Operating Activities: Operating activities provided $33.3 million in the first
nine months of 2009. Net income, when adjusted for depreciation, amortization,
deferred income tax and other non-cash income and expense items, provided $40.6
million. This included $8 million of distributions received from affiliates,
most materially from our investments in Transco. Changes in working capital and
other items used $7.3 million, including $6.9 million of pension and
postretirement medical trust fund contributions, $5.9 million of interest
payments and $4.4 million of income tax payments. These working capital items
were partially offset by $6.5 million of income tax refunds received in the
first quarter resulting from federal bonus depreciation on our assets as well as
our share of Transco assets placed in service during 2008.
During the first nine months of 2008, Operating activities provided $32.8
million. Net income, when adjusted for depreciation, amortization, deferred
income tax and other non-cash income and expense items, provided $38.3 million.
This included $8.2 million of distributions received from affiliates, most
materially from our investments in Transco. In addition, changes in working
capital and other items used $5.5 million. This was primarily due to $7.7
million of employee benefit funding, including $6.2 million of pension and
postretirement medical trust fund contributions
Investing Activities: Investing activities used $21.9 million in the first nine months of 2009, including $21.2 million of construction and plant expenditures and $0.7 million for other investing activities. During the first nine months of 2008, investing activities used $26 million, including $25.7 million for construction and plant expenditures and $0.3 million for other investments.
Financing Activities: In the first nine months of 2009, financing activities used $7.8 million, including $8.3 million for dividends paid on common and preferred stock, $1 million for preferred stock sinking fund payments, and $0.8 million for capital lease payments and other financing activities. These items were partially offset by $1.3 million from exercised stock options and the dividend reinvestment program and a $1 million reduction in special deposits for preferred stock sinking fund payments.
During the first nine months of 2008, financing activities provided $0.1 million, including $60 million from proceeds of the issuance of first mortgage bonds, $2.4 million from borrowings under a letter of credit, $1.8 million from exercised stock options and the dividend reinvestment program, a $1 million reduction in special deposits for preferred stock sinking fund payments and $0.3 million from other financing activities. These items were partially offset by $53 million to repay notes payable, $7.4 million for dividends paid on common and preferred stock, $2.4 million for unremarketed bonds, $1 million for preferred stock sinking fund payments, $0.9 million for debt issuance and deferred common stock offering costs and $0.7 million for capital lease payments.
Financing Credit Facility: We have a three-year, $40 million unsecured revolving credit facility with a lending institution pursuant to a credit agreement dated November 3, 2008. Our obligation under the credit agreement is guaranteed by our wholly owned, unregulated subsidiaries, C.V. Realty and CRC. The purpose of the facility is to provide liquidity for general corporate purposes, including working capital needs and power contract performance assurance requirements, in the form of funds borrowed and letters of credit. At September 30, 2009, there were no borrowings or letters of credit outstanding under the credit facility. We are currently negotiating an additional short-term credit facility in the amount of approximately $15 million.
Letters of Credit: We have three outstanding secured letters of credit, issued by one bank, that support the New Hampshire Industrial Development Authority, Connecticut Development Authority and Vermont Industrial Development Authority revenue bonds. These letters of credit total $16.9 million in support of three separate issues of industrial development revenue bonds totaling $16.3 million. We pay an annual fee of 0.9 percent on the letters of credit, based on our secured long-term debt rating. These letters of credit expire on November 30, 2009. The letters of credit contain cross-default provisions to East Barnet, a wholly owned subsidiary. These cross-default provisions generally relate to an inability to pay debt or debt acceleration, the levy of significant judgments, insolvency or violations under ERISA related to our employee and retiree benefit plans. At September 30, 2009, there were no amounts drawn under these letters of credit.
On September 28, 2009, we closed on replacement letters of credit totaling $11.1 million in support of the Connecticut Development Authority and Vermont Industrial Development Authority revenue bonds. These letters of credit are unsecured and will become effective on December 1, 2009. We will pay an annual fee of 2.5 percent on the letters of credit, based on our unsecured credit rating. These letters of credit expire on November 30, 2012. The letters of credit contain cross-default provisions to East Barnet, a wholly owned subsidiary. These cross-default provisions generally relate to an inability to pay debt or debt acceleration, the levy of significant judgments, insolvency or violations under ERISA related to our employee and retiree benefit plans.
Revenue Bonds: Because of the three-year term of the new letters of credit discussed above, the Vermont Industrial Development Authority and Connecticut Development Authority revenue bonds have been reclassified from Notes Payable to Long-Term Debt as of September 30, 2009.
Refinancing Plans: We are currently reviewing options to support working capital requirements resulting from investments in our distribution and transmission system.
Dividend Reinvestment Plan: Our Dividend Reinvestment Plan has been using Treasury shares as the source of common shares to meet reinvestment obligations since July 2007. In September 2009, we began using original issue shares to meet reinvestment obligations under the plan. This change will not have any impact on the amount of incremental cash flow brought in by this dividend reinvestment plan.
Covenants: At September 30, 2009, we were in compliance with all financial covenants related to our various debt agreements, articles of association, letters of credit and credit facility. A significant reduction in future earnings or a significant reduction to common equity could restrict the payment of common and preferred dividends or could cause us to violate our maintenance covenants. If we were to default on our covenants, the lenders could take such actions as terminate their obligations, declare all amounts outstanding or due immediately payable, or take possession of or foreclose on mortgaged property.
Investment opportunities in Transco Based on current projections, Transco expects to receive additional capital in 2009, 2010 and 2011, but its projections are subject to change based on a number of factors, including revised construction estimates, timing of project approvals from regulators, and desired changes in its equity-to-debt ratio. While we have no obligation to make additional investments in Transco, which are subject to available capital and appropriate regulatory approvals, we continue to evaluate investment opportunities on a case-by-case basis. Based on Transco's current projections, we could have an opportunity to make additional investments of up to $21 million in 2009, $43.5 million in 2010 and $12 million in 2011, but the timing and amount depend on the factors discussed above and the amounts invested by other owners.
Capital spending We expect to invest approximately $30 million to $35 million in 2009 primarily in our transmission and distribution infrastructure to ensure continued system reliability. This compares to capital expenditures of $36.8 million in 2008. These estimates are subject to continuing review and adjustment, and actual capital expenditures and timing may vary. As of September 30, 2009 capital expenditures were $21.3 million.
Performance Assurance We are subject to performance assurance requirements through ISO-New England under the Financial Assurance Policy of the FERC-approved tariff for NEPOOL members. We are required to post collateral for all net purchased power transactions since our credit limit with ISO-New England is zero. Additionally, we are currently selling power in the wholesale market pursuant to contracts with third parties, and are required to post collateral under certain conditions defined in the contracts.
At September 30, 2009, we had posted $7.3 million of collateral under performance assurance requirements for ISO-New England, which was comprised of $2 million in cash and $5.3 million in restricted cash. At December 31, 2008, we had posted $6.9 million of collateral under performance assurance requirements for certain power contracts, which was comprised of $3.3 million in cash and $3.6 million in restricted cash.
We are also subject to performance assurance requirements under our Vermont Yankee power purchase contract (the 2001 Amendatory Agreement). If Entergy-Vermont Yankee, the seller, has commercially reasonable grounds to question our ability to pay for our monthly power purchases, Entergy-Vermont Yankee may ask VYNPC and VYNPC may then ask us to provide adequate financial assurance of payment. We have not had to post collateral under this contract.
Cash flow risks Based on our current cash forecasts, we will require outside capital in addition to cash flow from operations and our $40 million unsecured revolving credit facility in order to fund our business over the next few years. Continued upheaval in the capital markets could negatively impact our ability to obtain outside capital on reasonable terms. If we were ever unable to obtain needed capital, we would re-evaluate and prioritize our planned capital expenditures and operating activities. In addition, an extended unplanned Vermont Yankee plant outage or similar event could significantly impact our liquidity due to the potentially high cost of replacement power and performance assurance requirements arising from purchases through ISO-New England or third parties. An extended Vermont Yankee plant outage could involve cost recovery via our forced outage insurance policy and recoveries under the PCAM but in general would not be expected to materially impact our financial results. Other material risks to cash flow from operations include: loss of retail sales revenue from unusual weather; slower-than-anticipated load growth and unfavorable economic conditions; increases in net power costs largely due to lower-than-anticipated margins on sales revenue from excess power or an unexpected power source interruption; required prepayments for power purchases; and increases in performance assurance requirements. See Retail Rates and Alternative Regulation above for additional information related to mechanisms designed to mitigate utility-related risks.
Off-balance-sheet arrangements We do not use off-balance-sheet financing arrangements, such as securitization of receivables, nor obtain access to assets through special purpose entities.
Prior to October 24, 2008, we leased our vehicles and related equipment under a single operating lease agreement. The individual leases under this agreement were mutually cancelable one year from lease inception. At September 30, 2009, the unamortized value was $6.8 million. On November 14, 2008, we received notification from the lessor that this operating lease agreement would be terminated. Under the terms of the lease, were required to terminate all agreements under this lease before November 14, 2009 and pay the unamortized value of the equipment upon termination. On October 30, 2009, we signed a vehicle lease agreement to finance substantially all of the vehicles covered by this former agreement. On October 24, 2008, we entered into a second operating lease for new vehicles and other related equipment leased after October 24, 2008. Our guarantee obligation under this lease is limited to 5 percent of the acquisition cost. The maximum amount of future payments under this guarantee is approximately $0.1 million. The total future minimum lease payments required for all lease schedules under this agreement at September 30, 2009 was $2.2 million. The maximum amount available for leases under this agreement is currently $4 million, of which $2.4 million was outstanding at September 30, 2009. At December 31, 2008, the maximum amount available for lease under this agreement was $4 million, of which $2.3 million was outstanding.
Global Economic Crisis Due to the global economic crisis, there has been a significant decline in lending activity. We expect to have access to liquidity in the capital markets when needed at reasonable rates. We also have access to a $40 million unsecured revolving credit facility and are negotiating an additional short-term credit facility in the amount of approximately $15 million. However, sustained turbulence in the global credit markets could limit . . .
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