Eversource Energy - Earnings Call - Q1 2017

Transcript

Speaker 0

Welcome to the Eversource Energy First Quarter Earnings Call. My name is Vanessa and I will be the operator for your call today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Jeffrey Kotkin, Vice President for Investor Relations. Sir, you may begin.

Speaker 1

Thank you, Vanessa. Good morning and thank you for joining us. I'm Jeff Kotkin, Eversource Energy's Vice President for Investor Relations. As you can see on Slide one, some of the statements made during investor call may be forward looking as defined within the meaning of the Safe Harbor provisions of The U. S.

Private Securities Litigation Reform Act of 1995. These forward looking statements are based on management's current expectations and are subject to risk and uncertainty, which may cause the actual results to differ materially from forecasts and projections. Some of these factors are set forth in the news release issued yesterday. Additional information about the various factors that may cause actual results to differ can be found in our annual report on Form 10 ks for the year ended December 3136. Additionally, our explanation of how and why we use certain non GAAP measures is contained within our news release and the slides we posted last night on our website under Presentations and Webcasts and in our most recent 10 ks.

Turning to slide two. Speaking today will be Phil Lembo, our Executive Vice President and CFO and Lee Olivier, our Executive Vice President for Enterprise Energy Strategy and Business Development. Also joining us today are Werner Schweiger, our Executive Vice President and Chief Operating Officer Jay Booth, our Vice President and Controller and John Marrero, our Vice President of Financial Planning and Analysis. Now I will turn to slide three and turn over the call to Phil.

Speaker 2

Thank you, Jeff. Today I'll cover four items: our first quarter financial results an update on several transmission projects, the status of key regulatory dockets and the status of our 2017 financing plan. Let's start with the quarter in slide three. Earnings were up $05 in the quarter. We earned $259,500,000 or $0.82 per share in the first quarter of 'seventeen compared with earnings of $244,200,000 or $0.77 in the first quarter of twenty sixteen.

Our transmission segment earned $0.30 per share in the first quarter of 'seventeen compared to $0.27 in 'sixteen. The primary driver for this earnings growth was our higher transmission rate base as well as we continue to invest in transmission projects that enhance the reliability of the New England power grid. I'll provide an update on our key transmission projects in a minute. On the electric distribution and generation side, we earned $0.36 per share in the first quarter of 'seventeen and that compares with $0.34 per share in the first quarter of twenty sixteen. This increase was primarily due to higher distribution revenues.

A portion of the increase was a result of the infrastructure investment programs we have in Connecticut and New Hampshire. In addition, as a result of our highly effective number one in the nation energy efficiency programs, we recorded higher loss based revenues in the quarter. These positive impacts were partially offset by higher storm restoration cost and higher depreciation. On the natural gas distribution side, we earned $0.16 per share in the first quarter of twenty seventeen, matching earnings in the first quarter of last year. Temperatures in the first quarter of 'seventeen were colder than during the same period of 'sixteen.

And these colder temperatures in 2017, and those were primarily in March, resulted in a 4.6% increase in firm natural gas sales in the first quarter of 'seventeen as compared to the previous year. However, the higher sales were offset by higher depreciation and property taxes. So I should also say that the first quarter temperatures in both 'seventeen and in 'sixteen were warmer than normal. At the Eversource Parents and Other segment, results were relatively flat year over year. For the full year, we continue to expect to earn between $3.05 and $3.2 per share.

And for the long term, we continue to project a 5% to 7% EPS growth. Turning from our financial results to operations. Our transmission investments totaled approximately $170,000,000 in the first quarter of twenty seventeen compared to approximately $140,000,000 in the first quarter of twenty sixteen. We continue to target nearly $1,000,000,000 in transmission investments for the year. As you can see on slide four, we continue to make progress on a number of the major transmission reliability projects.

Through March, we've invested just over $146,000,000 in 28 projects that comprise the Greater Boston Reliability Solution. And we expect to complete the Greater Boston work in 2019. We have invested just over 141,000,000 in the Greater Hartford projects, which are comprised of 27 smaller projects that we expect to complete next year. From operations, I'll turn to the regulatory activity, and I'll start in Massachusetts on slide five. Hearings will begin in June on the electric rate reviews we filed in January with the Massachusetts Department of Public Utilities for NSTAR Electric and Western Mass Electric.

Across the company, I believe we've done an excellent job in responding to the many data requests that come out during any rate case, and in this rate case in particular. Intervenor testimony was filed last Friday, and we expect to get a decision on the case around the November with new rates effective in January of 'eighteen. In terms of the intervenor testimony overall, I'd say there were no surprises from what we've seen in that testimony. One of the items included in our case is to legally combine NSTAR Electric and Western Mass Electric. FERC approved that combination earlier this year, And we hope to receive DPU approval later this year in our rate case.

Overall, we're pleased with how the case has progressed thus far. In Connecticut, on April 18, we joined the Office of Consumer Counsel and the Attorney General in filing a motion to modify the merger agreement that was approved by PURE in 2012. And that agreement required us to file rate reviews for new distribution rates to be effective December one of twenty fourteen and December one of twenty seventeen. So the motion jointly requested that PURE extend the deadline for implementing new rates to 07/01/2018. And PURE approved that motion on April 20.

So as background, there's really no particular significance. There was none until the December date in the 2012 merger agreement. You know, at the time the OCC and the AG wanted to be sure that the savings from the merger that we identified really benefited customers. And in our 2014 case about $30,000,000 in annual O and M savings were flowed back to CL and P distribution company customers at that time. Also improved reliability at CL and P was a focus in 2012, and it has improved greatly since that time.

Recently CLNP has been having its best years ever in terms of reliability and is now in the top tier versus its peers. So additionally, the 2014 rate review had a backdrop of CLMP significantly under earning on its ROE and needing to recover about $300,000,000 of deferred storm costs. So none of these issues are pressing at this time. So from our rate state reviews, I'll turn now to FERC and the various New England transmission ROE dockets. As you can see on slide six, on April fourteenth of this year, the D.

C. Circuit Court of Appeals vacated FERC's 2014 order that lowered the base New England transmission ROE from 11.14% to 10.57%. The 2014 decision also capped ROEs on the incentives on individual projects at 11.74% even if higher incentives have been previously approved on those projects. So the appeals court agreed with the New England transmission owners that FERC is required to go through two steps in a complaint proceeding. First, FERC needs to demonstrate why the existing ROE is unreasonable.

Only then can FERC set a new reasonable ROE. The fact that FERC found that 10.57% to be the new reasonable ROE wasn't enough to prove that our 11.14% was unreasonable. The court added that FERC bears the burden of making an explicit finding that the existing ROE is unlawful before setting a new lawful ROE. The court sent this issue back to FERC for further explanation on why the original ROE at the time of the complaint was not reasonable. The court also found that FERC did not establish a reason basis for its conclusion that the ROE should be set at the midpoint of the upper half of the zone of reasonableness.

The court sent this back to FERC for further justification. The court did not address the issue of incentive caps because this issue may depend on the outcome of FERC's decision resolving the first two issues that I mentioned. We continue to review the implementation of this decision with the other New England transmission owners. Also FERC must still address the ALJ recommendations received in 2016 in the second and third ROE complaints. On the fourth complaint, FERC's Chief Administrative Law Judge has scheduled arguments for May 18 on why FERC should not just dismiss the complaint in light of the Circuit Court of Appeals decision.

Ultimately, all those complaints may be affected by the recent Circuit Court decision and likely the FERC won't be able to address any of them until after the Commission has a quorum. The transmission earnings we provided today were based on the commission's original decision in the first complaint. We'll continue to evaluate whether this is the appropriate assumption as we move through the second quarter. To put it in perspective, our shareholders have invested equity of about $3,000,000,000 in our transmission segment. So each 10 basis point change in the earned ROE moves earnings by about $3,000,000 or about a penny per share per year.

Turning to our financing programs, both Eversource parent and CL and P issued $300,000,000 of debt in March. The parent's five year issue carries a coupon of 2.75% and CL and P's ten year issue had a coupon of 3.2%. We thank our fixed income investors for supporting our financings. A portion of the CNLP issuance was used to fund $150,000,000 5.375% bond maturity. We anticipate additional debt financings later in the year to support our capital program and to refinance a $400,000,000 5.625% maturity at NSTAR Electric.

Lastly, I just want to note the election yesterday of Christine Vaughan as Treasurer. Christine has been with the company for many years, recently as Vice President of Rates and Regulatory for all three states that we serve. And also has been with the company in similar capacity since 02/2004. She'll continue to oversee the regulatory filings while assuming new Treasury responsibilities, working closely with Emily O'Neil and Bob DeAngelo, our newly elected assistant treasurers. I look forward to introducing Christine to our investors later this year.

And that concludes my comments, and I'll turn it over to Lee.

Speaker 3

Okay. Thanks, Phil. I'll provide you with a brief update on our major investment initiatives and then turn the call back to Jeff for Q and As. Let's start with Northern Pass in Slide seven. The New Hampshire Site Evaluation Committee commenced final evidentiary hearings for the project on April 13.

After rejecting several notions or motions from the project opponents for a delay. Hearings are now scheduled to run through early August, and we have been quite pleased with how they have proceeded thus far. We consider the New Hampshire SEC schedule to be supportive of the committee's stated objective of issuing a final written order no later than September 3037. Hearings in April focused on two of the key criteria that must be considered. These criteria include whether Northern Pass and Episource have the technical, financial and managerial capability to construct, operate and maintain the project and whether approval of the project serves the public interest.

These are foundational issues in the SEC review process. Our witnesses were very well prepared and credible in responding to intervening questions, and those panels were completed on schedule. Earlier this week, hearings continued on the more technical aspects of the project and have continued to proceed quite well. Prior to the start of the hearings, the two key permitting agencies, the Department of Environmental Services and Transportation, recommended approval of the project by the SEC. Both departments approved their respective permits for the project.

We received the Department of Environmental Services recommendations and permits in early March and a report from the Department of Transportation in early April. The recommended conditions from these agencies were reasonable and consistent with our design. In addition, the State Division of Historical Resources, which is not one of the permitting agencies, also continues to review the project and in its recent status report concurred that their review of the process is on track. Nothing more is needed from the DHR before the SEC decision is reached. Once the New Hampshire SEC process is complete and assuming the project is approved with reasonable conditions, we expect a U.

S. Department of Energy presidential permit to be issued by the end of this year. Before that point, probably late in the third quarter, we expect the DOE to release its final environmental impact statement on Northern Pass. The preliminary EIS supporting the issuance of the presidential permit was issued nearly two years ago, and the DOE held a number of public meetings on the draft EIS in late twenty fifteen and early twenty sixteen. While we have been advancing the project on The U.

S. Side of the border, Hydro Quebec has been pursuing siting on the Canadian side. The three year Canadian process should be completed this summer. So by the end of this year, we expect Melvin Pass to be fully permitted in both The United States and Canada. This supports our plan to move into the construction phase in the first quarter of twenty eighteen.

In addition to the New Hampshire SEC and the New Hampshire Public Utilities Commission has been reviewing several items related to another pass. You may recall that last year, another pass was granted utility status by the PUC conditional upon receiving approval of the project from the SEC. In early April, following a preliminary review, the PUC ruled that it could move ahead with a review of the terms of the NPT proposed lease of Public Service of New Hampshire transmission rights of way. That decision was also over the objection of project opponents. We expect a PUC decision on the proposed lease terms later this year.

In March, the PUC also ruled on a 100 megawatt power purchase agreement signed last year by PSNH and Hydro Quebec. The PUC said that under the current state restructuring law, it did not have authority to approve such a PPA with PSNH. Such a contract is not required for siting or to move ahead with the project. In late March, the New Hampshire Senate overwhelmingly approved and sent to the House of Representatives Senate Bill 128, which would expand the PUC's authority to consider long term contracts that would lower customer costs and improve grid reliability and fuel diversity. The current legislation legislative session is due to end in late June, so we will be watching the progress of this bill closely.

We and Hydro Quebec will bid the Northern Pass project into the clean energy RFP that Massachusetts commenced March 31 for up to 9.45 terawatt hours annually for a period of up to twenty years. Bids are due on July 27, and the schedule indicates that the projects will be selected for negotiations by January 25. Separately, a draft RFP exclusively for offshore wind was filed by Massachusetts Utilities with the DPU last week. The schedule calls for the RFP to be final and issued to the market by June 3037. The RFP calls for interested bidders to submit at least one proposal for at least 400 megawatts.

The draft also stated that alternative bids for up to 800 megawatts would be considered if bidders can show that a larger project would provide significant net economic benefits to customers. Bidders can also submit an alternative bid for as little as 200 megawatts. The timeline of the draft RFP calls for the selection of the winning bids by the spring of twenty eighteen and the submission of contracts to the DPU by late twenty eighteen. They state when a fifty-fifty partnership between Eversource and Don Energy will bid into the RFP. Finally, turning to Slide eight next is now based.

We continue to discuss the gravity of New England's wintertime energy supply situation with policymakers in Massachusetts and New Hampshire, the two states that do not have recent legislation clarifying electric utilities' ability to sign natural gas supply contracts. Brayton Point, the region's largest coal and oil fired station, will shut down permanently at the end of this month, and the Pilgrim Diflo plant will shut down two years later. ISO New England continues to express deep concern over the region's ability to meet both gas heating and electrical requirements when temperatures drop. Later this year, ISO is due to issue a report on the challenges New England will face in future winters if no significant natural gas transmission capacity is built into the region. Now I'd like to turn the call back over to Jeff for Q and As.

Speaker 1

Thank you, Lee. And I'm going to turn the call back to Vanessa just to remind you how to enter the Q and A queue.

Speaker 0

And thank you.

Speaker 1

Thank you, Vanessa. Our first question this morning is from Julian Dumoulin Smith from UBS. Good morning, Julian.

Speaker 4

Jeremiah Borumon, how are you?

Speaker 1

Okay, Jeremiah.

Speaker 4

So just quick question on the new project that was announced by National Grid, Granite State Power Link. Do you guys view this as a competitor? And to the extent you can provide any commentary around how that would impact your thought process on moving forward with your own project?

Speaker 3

Yes. Jeremiah, this is Lee. No, we don't really look at that as a viable project for the April RFP. I mean, obviously, they would have to go through the entire presidential permitting process. They would have to which can take many years, as you know, they would have to go through siting in Vermont and New Hampshire.

And they don't have a supplier of energy. They don't have an interconnection into Canada or the Canadian process of three years. So when you look at the April RFP and you look at the preference in the Massachusetts RFP for projects that are in service by the December, we do not believe that is a viable alternative, which is not to say it couldn't be a project for a future RFP.

Speaker 4

Yes. Got it. And then just on Axos Northeast, is there any progress on legislation that's been moving forward or any commentary or update there?

Speaker 3

Yeah. I just think the general commentary there is we just continue to have those conversations with legislators. We continue to educate them on the alternatives to not building a pipeline from the standpoint of threats to reliability and extreme volatility during the winter time. And of course, as I mentioned, ISO is working on their no gas pipeline solution, which we believe will cause them to require certain actions to be taken that will not be in the best interest of the region's goals to reduce carbon and will not be in the best interest of maintaining price stability for our customers.

Speaker 4

Okay. Thanks very much.

Speaker 1

Thanks, Jeremiah. Next question is from Mike Weinstein from Credit Suisse. Good morning, Mike.

Speaker 5

Hi, good morning. Hey, just a follow-up on Jeremiah's questions a little bit. For the Northern Pass project, could you comment on is there any chance at all that the hearings could be pushed beyond September 30? What's your sense that September 30 is a good hard deadline in terms of their commitment to meeting it at the commission?

Speaker 3

Yeah. Mike, this is Lee. I would just say that the New Hampshire FCC has been very precise, very comprehensive in how they have ran the proceedings today. They are right on schedule. I think the more testimony that is given and provided by the project, the clearer the project becomes.

And we don't see at this point any probability or possibility that this date will be extended. I mean, meetings have been very crisp. The witnesses are very well prepared and with the ability to answer all of the questions to date.

Speaker 5

All right. Great. And to what extent is the land based renewables RFP important for Northern Pass or not important?

Speaker 3

Well, clearly, it is important from the standpoint that you have Hydro Quebec that wants to sell their energy into the New England marketplace. And if there is the ability to participate inside of an RFP and get a long term contract at a fixed price, that's an advantage to HQ. So clearly, there's an advantage there. But in any case, the RFP in and of itself does not determine the longevity of the project and the success of the project because, in fact, there will be many RFPs, there will be many retirements. As we've said before, we see about 10,000 megawatts of retirements in the Wingman.

And Northern Pass will be viable in any of those as a source of clean energy for the region.

Speaker 5

All right. Great. And just one last one for Phil. On the I'm sorry if I missed this, but can you just remind us what as you head into the Massachusetts rate cases for NSTAR and Wameka, what is the earned ROEs at those utilities going into the case? And what are you seeking coming out of it?

How important are these rate increases for these utilities?

Speaker 2

Yeah, Mike. So in the request we're looking for a 10.5% ROE in the case and the total rate increase is about $60,000,000 at NSTAR Electric and about $36,000,000 at Western Mass Electric. So certainly they're increases but not double digit types of increases. So we're earning close to those numbers. NSTAR Electric at the end of twenty sixteen was probably a little shy of that number of 10.5% when you do all the calculations for Massachusetts.

And Western Mass was closer to 9%. So not at the levels that we were, looking for in this case.

Speaker 5

Okay, thanks a lot guys.

Speaker 1

Thanks Mike. Next question is from Praful Mehta from Citi. Good morning, Praful.

Speaker 6

Good morning, guys. Thanks. So just quick question on AXIS Northeast, more around what are the risks to timing and if there are delays, just wanted to understand what is the capital allocation strategy. Is it to wait and hold on to the capital to see when you actually can deploy towards Access Northeast? Or is there any share buyback or anything else on the cards if there are meaningful delays around Access Northeast?

Speaker 2

Yes. So this is Phil Praful. What we said in our long term forecast, the 5% to 7%, that Access Northeast is really a small part of the far end of that forecast. So it's not as if there'd be a significant amount of capital that we are expecting in our plan over the next two to three near term years. So there really wouldn't be a significant amount of capital to think about redeploying.

In terms of, you know, share repurchases, you know, we're primarily interested, as we've said, in infrastructure that meet the needs of our customers, in region's energy needs. And, you know, really we're looking for projects that, are clean, that improve reliability and that manage to keep customer costs in line. So we don't have a share repurchase program authorized and our focus would be on the infrastructure development.

Speaker 6

Got you. Fair enough. And just quickly, any color on FERC ROE given all this uncertainty on where the ROE finally shows up? And as you laid out, the implications for you guys based on the invested capital you have on the transmission side, How do we think about the timing of how this plays out? How are you guys viewing it internally?

You said you're going to review whether using your existing rate is the right one going forward in terms of your forecast. So I guess if you can just put out at least the boundaries of how we should think about the potential outcomes here.

Speaker 2

Sure. I guess in the basic part of your elements of your question really I think get to the point which is the situation is very fluid. You know, the court decision is still recent and really the New England transmission owners, you know, as a group need to decide what the next steps will be. So, you know, that probably is a near term determination because in June, you know, the transmission owners need to file a proposed regional network service rate. So it's certainly an active topic for discussion right now with the New England transmission owners.

You know, one could say that the last approved ROE by FERC is the 11.14, so that's the last actual number that's out there. So any other number is as good as any other number that's not 11.14. So we're on top of this right now. We're working with the other transmission owners, but I think, you know, you should see more from all of us in the near term.

Speaker 6

Got you. Thank you, guys.

Speaker 1

All right. Thanks, Praful. Next question is from Travis Miller from Morningstar. Good morning, Travis.

Speaker 7

Good morning, thank you. I was wondering real quick on the gas distribution demand side. You mentioned the 4.6% increase in the breakout of the numbers there. How much of that was core non weather related? And is that tracking along your plan?

Speaker 2

Well, as I said, normal, you know, it's below. You know, we've had two, the comparison of this year to last year, you know, was better because it was a bit colder this year. But as I said, both 2017 and 2016 were quite a bit below normal, in the neighborhood of 6% to 7% heating degree days being below normal there. So we generally plan to normal. So I would expect that that number would have been higher should we had we had hit normal weather.

Speaker 7

The 4.6% would have been higher?

Speaker 2

Correct. Yeah, it was below normal weather in the first quarter.

Speaker 7

And then Okay. Was just generally

Speaker 1

Go ahead. Just

Speaker 7

generally when you think about all the regulatory stuffs going on, the rate cases, FERC, the transmission projects with gas or electric, what would you say are the number one or number or two most important, most critical outcomes or resolutions that you'd need for the company overall and particularly shareholders?

Speaker 2

Well, Travis, think I've always said, you know, when you're in a business where, you know, 100% of your revenues are determined in regulatory arena, certainly, you know, positive regulatory outcomes are important, you know, across the board. And if there's one company that you can point to as the poster child for getting to positive regulatory outcomes and having constructive relationships, whether they be at the state level or other, it's Eversource. So we feel very good about, our abilities there and our, ability to work with constructive regulation in the state. I think they're all important because we are highly regulated obviously, but, we do an effective job there.

Speaker 7

Okay, great. Thanks so much.

Speaker 1

Thanks, Travis. Next question is from Caroline Bone from Deutsche Bank. Good morning, Caroline.

Speaker 8

Hey, good morning, guys. I just have some follow-up questions on Northern Pass. So last quarter you guys talked about the need to place an order for certain equipment. I was just wondering if you had any further idea on when that order might be placed.

Speaker 3

Yes, Caroline, this is Lee. The schedule that we have right now with the SEC in New Hampshire is really May is really all about a couple of things. It's all about construction and it's all about the environmental impact. And that ends probably in the June. And then at that point in time, we'll have a better sense of the construction practices.

We'll have a better sense of any other environmental impact that may cause us to change the equipment orders from our current design. So I think we'll be in a better position then to look at making those orders around that period of time. We continue to have conversations with the vendors such as ABB and to understand more about what will be required to do the design and construction or manufacturing. But really, we need to get to the June to have a better sense of that.

Speaker 8

Okay. That's very helpful. But I guess one just follow-up to that. Does the Massachusetts Clean Energy RFP have any impact on when that order might be placed? Or is it kind of a separate issue?

Speaker 3

I would conclude that that's really a separate issue. I mean, really it's all about understanding what the final design is because we don't want to go forward, order equipment, kickoff engineering in and around it, only to find out that design is different and that becomes a redo and it's an expense that we don't want to incur.

Speaker 8

Okay. Thanks. And then just one more minor one. With regards to the final EIS from the DOE, do you do they want to see the final SEC decision before they put out their final EIS?

Speaker 3

No, not necessarily. The presidential permit will come after the SEC decision. So you'll final have EIS, you'll have the SEC outcome and then you get the presidential permit. So no, they don't need to see that.

Speaker 8

All right. Thanks very much.

Speaker 3

You're welcome.

Speaker 1

Thanks, Caroline. Next question is from Paul Zimbardo from Citadel. Good morning, Paul.

Speaker 9

Hi, good morning. I had a quick clarification question. I'm sorry, was a little confused. On Mike and Carolyn's question, I know the slide says first quarter twenty eighteen construction commencing. Would you commence construction before that, I think you said January 25 RFP selection date?

Speaker 3

I'm sorry, is the question?

Speaker 1

Are you talking about the Mass RFP identifying winners by January twenty five of twenty eighteen? And would the construction schedule in the first quarter of 'eighteen depend on what happens on January 25? Is that your question, Paul?

Speaker 9

Yes. Like if there was any firmer timing in January or in first quarter twenty eighteen.

Speaker 3

No, I think currently where we are is assuming we have a successful outcome of the SEC process, we will start construction in the first quarter of twenty eighteen.

Speaker 5

Okay, great.

Speaker 9

Thank you very much.

Speaker 1

Thank you, Paul. That's the last question that we have for this morning. So we want to thank you very much for joining us. And we look forward to seeing you at the upcoming conferences over the course May. Take care.

Speaker 0

And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.