Eversource Energy - Earnings Call - Q4 2017

Transcript

Speaker 0

Welcome to the Eversource Energy Fourth Quarter twenty seventeen and Year End Results Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then one on your phone.

Please note that this conference is being recorded. And I will now turn the call over to Mr. Jeffrey Kotkin. You may begin, sir.

Speaker 1

Thank you, Vanessa. Good morning and thank you for joining us. During this call, we'll be referencing slides that we posted last night on our website. I'm Jeff Kotkin, Eversource Energy's Vice President for Investor Relations. And as you can see on slide one, some of the statements made during this investor call may be forward looking as defined within the meaning of the Safe Harbor provisions of The US 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, and the 10 Q for the three months ended September 3037. 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 and in our most recent 10 ks. Turning to slide two, speaking today will be Jim Judge, our Chairman, President and CEO Lee Olivier, our Executive Vice President for Enterprise Energy Strategy and Business Development and Phil Lembo, our Executive Vice President and CFO.

Also joining us today are Jay Booth, our VP and Controller John Marrero, our VP of Financial Planning and Analysis. Now, I will turn to slide four and turn over the call to Jim.

Speaker 2

Thank you, Jeff. I want to thank everyone who's joining us this morning for our recap of the year that we just completed and a comprehensive look at our opportunities and financial outlook for the next four years. To start, I want to congratulate our 8,000 employees for the great progress we made over the past year in achieving our vision of being recognized as the best utility in the country and as a catalyst for clean energy development in New England. Our region is mandating a 75% to 80% reduction in carbon emissions by the year 2050 and we plan to play a central role in helping New England reach its targets. Older coal, oil and nuclear plants continue to retire only to be replaced by renewables and natural gas.

Two large and economic new sources of renewable energy are hydroelectric power in Quebec and offshore wind Southeast Of Massachusetts. Through Northern Pass and Bay State Wind, we expect to be deeply involved in accessing both. And Hydro Quebec and are great partners. We continue to believe that Northern Pass is uniquely designed to significantly lower the region's greenhouse gas emissions, reduce energy costs and reduce our growing and increasingly ominous dependence on natural gas for power generation. We were surprised and disappointed and I'm going to say humbled by the recent decision from the New Hampshire site evaluation committee rejecting the project.

Clearly, we have not fully addressed all the major concerns in New Hampshire yet. We expected the process to allow us to address what were legitimate concerns raised during the proceedings. If allowed rehearing, we expect there may be an opportunity to address those concerns. In a couple of minutes, Lee will discuss the steps we are taking to move the project ahead. At the same time, we continue to lead the way in bringing other cost effective energy solutions to customers in the region.

We have completed the sale of our fossil plants, are well underway in the construction of 62 megawatts of additional rate based solar, are beginning to build our first two utility scale battery storage facilities, are developing the infrastructure needed to expand access to electric vehicle charging stations in the region and we are continuing to run the nation's number one ranked energy efficiency programs. We also acquired Aquarion, adding a long term opportunity to move into the water delivery business. Rates are fully decoupled at our FERC regulated transmission business. And on the distribution side, we now have full revenue decoupling for more than 3,000,000 of our 4,000,000 customers. This allows both our customers and our shareholders to benefit from the implementation of our aggressive energy efficiency programs and be hurt by them financially.

Moving from our strategic initiatives, we also achieved significant operational, financial and regulatory successes over the past twelve months. We are working with regulators in each of the states that we serve to identify the investments needed to modernize the electric grid and improve its capabilities and resiliency. We have doubled the pace at which we are replacing older natural gas pipelines and are accelerating Aquarion's water main replacement program. We also have a group of new commissioners at FERC who clearly favor infrastructure enhancement. We had a record setting electric reliability and employee safety performance, our best year ever on both measures and are well within the top quartile of our industry peers.

On the regulatory side, we achieved constructive outcomes to NSTA's first fully litigated Massachusetts distribution rate case in over thirty years and recently negotiated and filed with regulators in Connecticut, the first settlement of a Connecticut Light and Power distribution rate case since 1986. Turning to Slide five, we reported GAAP earnings of 3.11 despite a very mild summer. We also reiterate our 5% to 7% EPS growth now using the 2017 earnings level as our base. We have both the investment opportunities and the balance sheet capacity to deliver on that outlook. Slide six shows that over one year, three year, five year and ten year periods, our shareholders have benefited from our strong execution of our business strategy.

Our total return has consistently exceeded our peer averages. In 2017, Eversource's return to shareholders was 60% higher than our EEI peers and over ten years, nearly two times our peers' performance. Part of that strong total return profile has been a rising dividend. We are committed to raising our dividend at a pace that is above the industry average and consistent with our earnings growth. As you can see on Slide seven, we announced 6.3 increase earlier this month.

In December, we were upgraded by S and P to A plus resulting in a two notch difference between us and the second highest rated electric utility. We have the financial strength and the knowledge and skills to help our region meet some very significant energy related challenges. Turning to Slide eight, the coal snap in late December and early January reminded us just how fragile New England's wintertime energy supply situation is today and how it's likely to worsen due to additional plant retirements before it improves. During that period, New England's natural gas prices were but the highest in the world. While just 200 miles to the east of us, natural gas prices were the lowest in the world.

This differential costs our region approximately $500,000,000 over less than a two week period. As Lee will discuss in more detail, the issue is not just economic. Running the region's oil, coal and diesel fleet flat out for two weeks added over 1,000,000 tons of carbon emissions, highlighting the critical need for additional wintertime natural gas capacity in New England. These challenges require a solution and we're well positioned to lead in this effort. Before closing my remarks, I want to stress that each day our employees are on the frontlines making us a trusted partner in our efforts to reduce energy costs, providing a top tier level of service and promoting our region's energy policies.

There is no finer group in the industry and they are the primary reason I am so optimistic about the company's future. Now I will turn over the call to Lee.

Speaker 3

Okay. Thanks, Jim. I'll provide you with an update on the major projects, expand on Jim's comments on the New England winter supply situation and then turn the call over to Phil. I'll start with Novan Pass. Following our November earnings call, we received a string of good news about the project with various federal and state approvals listed on Slide 10.

In late January, a combination of Novan Pass Transmission and Hydro Quebec's all hydro energy offering won the entire Massachusetts Clean Energy RFP over more than 40 other clean energy projects of various scales and technology. The RFP sought nearly 9.5 terawatt hours a year of clean energy for up to twenty years and our bid was the sole winner. Clearly, MPT is the best clean energy solution for the region. However, on February 1, we experienced a setback. The New Hampshire SEC had commenced deliberations on January 30 and had determined that Northern Pass possessed the financial, technical, and managerial capability to construct, operate, and maintain the project.

When the SEC members began discussing criteria known as orderly development, they noted the benefits Northern Pass would have in multiple areas, including promoting economic development, job growth, and increased property tax revenues. But members indicated they were concerned about other items, such as tourism, property values, and the impact on municipal development plans. Without discussion of potential conditions that could have been imposed to address those concerns, the SEC in the deliberations and voted unanimously to reject the project. Left undiscussed were key topics such as whether Northern Pass would serve the public interest, whether it would have an unreasonable adverse effect on aesthetics, historic sites, air and water quality, and the natural environment and public health and safety. As Jim said, we are deeply disappointed by the committee's decision.

We had a compelling case about the key benefits of the project, including more than 3,000,000,000 of economic benefits to the state over the life of the project, the elimination of 3,000,000 tons of carbon emissions into New England each year, that's the equivalent of taking about 670,000 cars off the road, the creation of 2,600 jobs in New Hampshire during construction, the $600,000,000 of annual regional cost energy savings, including $62,000,000 a year in New Hampshire. The additional $30,000,000 in property tax revenues in New Hampshire annually and an average increase in New Hampshire's GDP of 162,000,000 a year. And a commitment to fund $200,000,000 over twenty years for New Hampshire communities, tourism, clean energy, and economic development. We will ask the New Hampshire FCC to reconsider its decision shortly. If the committee reconsiders its decision and votes to approve the project, we expect to begin construction this year.

The SEC decision has been reviewed by evaluators in the Massachusetts Clean Energy RRP. On February 14, the electric distribution companies with the Massachusetts Department of Energy Resources and the RRP's independent evaluator notified Northern Pass that they will continue negotiations with the project through March 2738. But in parallel, they will negotiate with a runner-up project. Hydro Quebec leadership continues to support the project as by far the most advanced initiative to boost the sale of Quebec hydroelectric power into New England. We continue to work to advance the project forward, and we will update you as we move ahead.

From Northern Pass, I want to move to slide 11, Bay State Wind, our fiftyfifty partnership with Oosted, the world leader in the development of offshore wind. Bay State Wind seeks to construct and operate at least 2,000 megawatts of offshore wind facilities, 15 to 25 miles south of Martha's Vineyard. Our site is very well situated to serve four states that are currently pursuing long term contracts for renewable energy, including offshore wind. Turning to Slide 12, in December, we submitted two bids into the RFP overseen by the Massachusetts Department of Energy Resources and the state's three electric utilities. The RFP required all three bidders to submit a proposal for 400 megawatts of offshore wind.

It also provided an option to submit a second bid for as little as 200 megawatts and for as much as 800 megawatts. Bay State Wind submitted highly compelling bids for both 400 megawatts and 800 megawatts. The two other bidders submitted proposals for offshore wind generation and the bids evaluators are due to make their selection by April 23 and to submit contracts to the Massachusetts Department of Public Utilities by the July. We believe that our Bay State Wind Partnership, the combination of the world leader in offshore wind development with New England's leading transmission developer, will provide evaluators with two very attractive options to consider. If we are chosen, we would initiate the federal and state permitting processes in late twenty eighteen and expect to be in service in the early 2020s.

This RFP is just the first of multiple offshore wind RFPs in which we expect Bay State Wind to bid. Massachusetts is required to contract for 1,600 megawatts of offshore wind by 2027, but it is seeking no more than 800 megawatts in this RFP. Three weeks ago, Connecticut issued an RFP for certain Class one renewable resources, including nearly 200 megawatts of offshore wind. Rhode Island has indicated an interest in contracting for up to 1,000 megawatts of additional renewables by 2020 and announced a plan for a 400 megawatt RFP later this year. Finally, New York has indicated that it will seek proposals for 800 megawatts of offshore wind over the next two years.

Bay State Wind's favorable geographic location would allow it to bid into all of these RFPs. But due to competitive reasons, we have not provided investors with specific levels of expected investment in Bay State wind at this time. Offshore wind is particularly favorable in New England during the winter period when wind speeds along the Atlantic Coast are higher and more consistent and when the region has the greatest challenges for related fuel supplies. Furthermore, Bay State Winds facilities can be interconnected into our three forty five kV AC system with minimal upgrades onshore. While offshore wind facilities would improve the region's fuel diversity, particularly in the winter, they're not nearly enough to offset the need for additional natural gas pipeline capacity.

Moving to slide 13, Jim earlier reviewed some of the cost and environmental impacts resulting from the late December and early January cold snap. The extended cold snap was similar to the polar vortex in 2013 and 2014. Natural gas prices soared as available supplies were directed not to power plants, but to heating homes and businesses that have paid for firm capacity. Without adequate supplies of natural gas, New England grid operators turned to older and efficient, costly and high carbon emitting oil and coal plants to keep the region's lights on. During the cold snap, as little as 2,500 megawatts of the region's 18,000 megawatts of natural gas generation was available to run on natural gas, a situation that drove the increased oil and coal usage.

The intensive oil consumption meant that many of the region's oil units were within two days of running out of oil by the time that the cold weather snap broke. Massachusetts Energy Secretary Matt Beaton described the impact on emissions a disaster. Slide 14 illustrates the tremendous reduction in greenhouse gas emissions in New England that they have achieved since 02/2001, largely because of the switchover from oil and coal to natural gas. There's no question additional access to natural gas in the winter is critical to ensure reliability, lower customer cost and to meet the region's greenhouse gas reduction goals. We continue to discuss the supply situation with various stakeholders in New England and Washington to identify a path that will allow a brownfield project to move forward.

We know that ISO New England is increasingly concerned about this wintertime vulnerability, which will be further challenged when Pilgrim's 700 megawatts of nuclear generation facilities retires next year. An important fuel security report that ISO New England published last month indicated that no later than the winter of twenty twenty four and 2025, the New England would likely require load shedding six days a winter for a total of fourteen hours. And that was a reference case, in a severe case that load shedding would become more frequent. In the 2018 Regional Electricity Outlook published last week, ICE New England's Chairman and its CEO wrote, and I quote, the coming years as more oil and coal and nuclear plants leave the system, keeping the lights on in the wind room would become an even more tenuous proposition. A new group of Massachusetts business and civic leaders from across the Commonwealth, the Mass Coalition for Sustainable Energy wrote governor Baker and the state legislature leadership on February 7, expressing deep concern about, and I quote, the existing and rapidly increasing shortfall of reliable and affordable energy in New England.

They noted, again, I quote, by boosting our supply of natural gas, we can stabilize energy prices, reduce cost to ratepayers, attract jobs, and, for business, new businesses, while also speeding our transition to renewable energy and advancing our position as a climate change leader. We firmly believe that periodic load shedding during bitter winter days will be a terrible development for the region. We will continue to develop strategies that would allow for a pipeline expansion to proceed and plan to update you later this year on that progress. Now I'm going to turn the call over to Phil.

Speaker 4

Thank you, Lee. And today, I'll cover our fourth quarter and full year 2017 financial results, our new full year capital expenditure and rate based growth forecast, the status of our key regulatory dockets and discuss the impact of tax reform. I'll start with our fourth quarter results on Slide 16. Earnings were $0.75 per share in the fourth quarter of twenty seventeen compared with $0.72 per share in the fourth quarter of twenty sixteen. The primary driver for the increase was improved electric distribution results where earnings were $0.33 per share compared with $0.26 per share for the same period in 2016.

The earnings increase was due primarily to a lower effective tax rate, lower non tracked operations and maintenance costs and modest revenue growth. And these were partially offset by higher depreciation and property tax expense. Our Electric Transmission segment earned a total of $0.32 per share in the fourth quarter of twenty seventeen compared with $0.33 in the fourth quarter of twenty sixteen. The decline was due to a $05 gain we recorded in 2016 as a result of FERC's approval of a settlement allowing us to recover certain merger costs through transmission rates. There was no such gain in the fourth quarter of twenty seventeen.

We did benefit, also from higher transmission rate base due to continued investment in our infrastructure. Transmission capital expenditures totaled $932,000,000 in 2017 compared to $897,000,000 in 2016 and $8.00 $7,000,000 in 2015. Earnings at our Natural Gas Distribution segment totaled per share in both the fourth quarter of twenty seventeen and 2016. A 4.7% increase in the fourth quarter sales in 2017 was offset by higher depreciation, O and M and property tax expense. At Eversource Parent and Other, we earned $02 per share in the fourth quarter of twenty seventeen compared with $05 per share in the fourth quarter of twenty sixteen.

The decline was primarily due to a $05 benefit in the fourth quarter of twenty sixteen relating to tax deductions on certain executive comp payments. Turning from the fourth quarter to full year results, we earned $3.11 per share in 2017 compared with $2.96 per share in 2016. Our electric distribution business earned $1.57 per share in 2017 compared with $1.46 per share in 2016. The improvement was primarily due to a lower effective tax rate and lower operations and maintenance costs, partially offset by higher depreciation and property tax expense. Our transmission segment earned $1.23 per share in 2017 compared to $1.16 in the prior year.

The improvement was due to an increased level of investment, partially offset by the absence of the merger cost recovery item I mentioned earlier. Our Natural Gas Distribution segment earned $0.23 per share in 2017 compared with earnings of $0.24 in 2016. The slight decline was due to higher depreciation, O and M cost and property taxes and nearly offset by a 3% increase in sales. The Eversource parent and other earned $08 per share in 2017 compared with $0.10 in 2016. The decline was primarily due to the 2016 tax benefit I mentioned previously.

Turning from 2017, let's take a look at 2018 and our guidance. As you can see on Slide 17, we project earnings this year between $3.2 and $3.3 per share. Positive year over year drivers include investments, in our Electric Transmission segment, where we expect to invest approximately $900,000,000 again this year on reliability projects and the addition of Aquarium Water, which we closed near the very end of 2017. We also expect to benefit from the improvement of results in our Western Massachusetts operations, which had been under earning in recent years, but implemented a modest rate increase at the beginning of this month. I'll talk about our rate proceeding in a minute.

Partially offsetting these benefits are expected increases in property tax and depreciation expense in the absence of PS and H generation earnings. As Jim talked about, we divested of the Thermal business at the end of early in twenty eighteen. We completed the sale in January and expect to complete the sale of the hydro plants in the coming months and the securitization of remaining stranded costs in the spring. We expect total operations and maintenance costs, to decline by about 1% to 2% in 2018. From 2018 guidance, turn to Slide 18 and our new four year capital expenditure and rate base growth forecast.

As you can see, we expect to invest nearly $11,000,000,000 infrastructure over that four year period. It is significantly higher than the $9,600,000,000 four year plan we showed you last year. I'll discuss some of the major contributors to that increase. First is our new water segment as a result of our Aquarion transaction. We project approximately $435,000,000 of capital expenditures at Aquarion over the next four years.

This compares to approximately $300,000,000 of capital expenditures, at Aquarion over the previous four year period. The increase is due primarily to accelerated water main replacements and a major project to increase our ability to move water from Bridgeport, Connecticut area, to address the growing needs in the, Stanford, Greenwich area of the state. In the natural gas segment, we now project more than $1,600,000,000 of capital spending in our new four year forecast compared with, $1,450,000,000 in the previous forecast. Much of this investment is related to more rapid replacement of our older cast iron, bare steel and other mains and services. As a result of constructive regulatory frameworks, we are now able to complete replacement of these mains and services in fifteen years in Connecticut and twenty two years in Massachusetts as the system is a larger inventory of pipes to be replaced.

These needed investments will be recovered largely through, capital tracker mechanisms. In both states, we have doubled the rate of replacement over the past five years, an investment that will help us, lower our O and M cost by reducing the number of repairs and reduce also methane emissions, a measure which is followed closely by us and by the growing number of ESG investors we have. Within the transmission segment, we've split our reliability projects at CL and P, NSTAR Electric and PS and H from Northern Pass Reliability Transmission from Northern Pass. Reliability transmission spending is projected at 2,600,000,000.0 through 2021, an increase of nearly $680,000,000 in the years 2018 through 2020, plus another $525,000,000 in 2021. Since last year's forecast, we have increased transmission CapEx at the T and D utilities by approximately $141,000,000 in 2018, $260,000,000 in 2019, dollars $280,000,000 in 2020.

These increases reflect projects that are, have already completed their required regulatory reviews or are currently already going through the necessary processes. Turning to Slide 19, you can see that we ended 2017 with about $16,700,000,000 of rate base, and this reflects the addition of Aquarion and the removal of the New Hampshire generation. So we added about $1,000,000,000 of rate base in 2017, in infrastructure. The $16,700,000,000 total includes about $8,000,000,000 of electric distribution rate base, dollars 6,000,000,000 of electric transmission, rate base at the three T and D utilities, plus $200,000,000 at Northern Pass, dollars 1,700,000,000.0 of natural gas distribution rate base and nearly $800,000,000 of water utility rate base. By the end of twenty twenty one, we expect rates base to total nearly 22,800,000,000.0 including the $1.6 for NPT.

In total, that represents more than an 8% rate base compound average growth rate from 2017 through 2021. NPT represents only 1.5 of that total, compound annual growth rate. We know that, many of those on the call will take our CapEx and rate based forecast models and compare them to what we provided previously. Slide 20 is designed to help you out by comparing our currently projected rate base at the end of twenty twenty of $21,800,000,000 with the $19,700,000,000 we projected a year ago. The additional $2,100,000,000 comes from three primary sources.

Aquarion represents $920,000,000 of rate base by the end of twenty twenty. This wasn't in our forecast a year ago. Additional transmission and distribution investments at our electric and natural gas utilities added nearly $600,000,000 and tax reform also added nearly $600,000,000 for reasons I'll discuss in a minute. And our Northern Pass estimate is roughly the same in both years, so had no impact on the increase. As a result, and as Jim mentioned, we have confidence in our ability to achieve our earnings per share growth rate of 5% to 7% through 2021 using our base of $3.11 per share that we earned in 2017.

We consider the 5% to 7% growth rate to be very resilient under a wide range of scenarios. We understand, that the market is currently giving us very limited, if any credit, for future Northern Pass, earnings, but our message today is that our company has a wide range of levers to achieve its earning growth objectives with or without Northern Pass. Our new end of year twenty twenty rate base forecast even without Northern Pass is about $500,000,000 higher today than it was a year ago with Northern Pass. Also, have a track record of identifying additional capital expenditure opportunities as we move through the forecast. And our 5% to 7% growth rate assumes that O and M costs will remain essentially flat over the forecast period as compared to our five year O and M reductions that have averaged greater than 4%.

Also, unlike some of our peers, we do not need to issue equity as a result of tax reform. Our solid financial profile combined with constructive regulatory environments, fully regulated C and D business profile, our exit from generation and the addition of water distribution assets all support a low risk business profile and strong credit ratings, and we expect those ratings to remain strong going forward. Slides twenty one and twenty two show how we expect the benefits of tax reform to flow overwhelmingly to our customers and be relatively neutral to us. The new distribution rates, in fact, that took effect, this month for our 1,400,000 Massachusetts, electric customers reflect about $56,000,000 in annual benefits from the reduction of the federal corporate tax rate from 35% to 21%. Similarly, the three year settlement we reached last month in CL and P's distribution rate case is expected to reflect about 45,000,000 to $50,000,000 or similar amount, of annual customer benefits, from the lower tax rate.

The majority of our excess accumulated deferred income tax balances will be returned to our distribution customers over a longer period of time in accordance with IRS regulations, very similar to the current process for tax purposes. We will file details with our regulators on how the lower corporate tax rate will benefit customers across all of our operating companies over the next several months. We expect very minor impacts from tax reform on our bottom line in 2018. There will be

Speaker 5

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Speaker 4

smaller tax shield from interest on our parent debt, but that will largely be offset with other items. We project an effective tax rate in 2018 of between 23.5% to 24.5%. We also project paying federal and state income taxes of between $100,000,000 and $120,000,000 in 2018. And unlike, most or some of our peers, we were a cash taxpayer in 2017 as well. Over the longer term, phasing out the impact of bonus depreciation beginning this year and the buildup of new deferred income taxes at a lower rate will lead to rate base growth at a more rapid rate since accumulated deferred income tax balances are used in all our regulatory jurisdictions as offsets to rate base.

Turning to Slide '23 and recent regulatory developments. At the beginning of this month, we implemented new rate schedules for our Massachusetts electric utilities, including the initial impact of the tax reform that I mentioned. The distribution rates for customers in Massachusetts actually declined by nearly $19,000,000 As a result of Massachusetts rate decision, the Mass, Department of Public Utilities approved the merger of Western Mass Electric into NSTAR Electric effective at December 31. So you will no longer see standalone Western Mass financial statements. The order also approved full revenue decoupling, an inflation based adjustment mechanism that will allow modest annual increases at the beginning of each year, for the next four years beginning in 2019 and a 10% ROE.

The rate decision also approved $45,000,000 for the initial build out of electric vehicle infrastructure and another $55,000,000 to build battery storage on Cape Cod and Martha's Vineyard, both over the next five years. Turning to Slide 24. In Connecticut, we reached our first settlement of a CL and P rate case in about thirty years, as Jim mentioned. The settlement with the Office of Consumer Counsel and the prosecutorial unit of the PURA was filed with the commission last month and hearings on the settlement were held this month. The settlement terms call for 9.25% authorized ROE with a 53%, equity.

We are hopeful that the settlement, which includes a resiliency tracker, will allow us to avoid new distribution, rate filings for a full four year period. A draft decision on the settlement is scheduled for next month with a final decision on April 18. New rates, would be effective May 1. In both Massachusetts and Connecticut, we believe we were able to achieve constructive outcomes. We were able to demonstrate a strong ability to provide outstanding customer service reliability while also effectively controlling our costs.

On average, as I mentioned, our O and M overall has declined by more than 4% annually since our merger was consummated nearly six years ago, including a reduction of about 3.5% in 2017. Our reliability and safety metrics are also solidly in the top quartile of our industry peers as we achieved our best ever operating performance in 2017. These constructive rate case outcomes allow us and enable us to continue to drive high levels of performance for our customers. Turning to Slide '25, we and the other New England transmission owners continue to litigate the fourth transmission ROE complaint before the FERC. Hearings were held in December and an ALJ recommendation is due next month.

Meanwhile, we are awaiting a ruling from the commissioners on how, they will address the court ordered remand of their decision in the first complaint as well as initial rulings in the second and third complaints. So our results and our guidance reflect the current 10.57% base ROE that FERC approved four years ago when it decided the first complaint. Turning to Slide 26. At the same time, we are completing our New Hampshire Generation divestiture, we concluded the purchase of Aquarion, moving out of a regulated business line with a declining rate base and moving into a business line with growth opportunities. Beginning in 2018, we'll report Aquarian earnings as a separate business segment.

At the end of twenty seventeen, its rate base, about 90% of which is, from its Connecticut operations, totaled about $770,000,000 We expect that rate base will, grow by 6% to 7% organically, primarily through connecting new customers, replacing older pipes and embarking on a new five year project to move, additional water supplies into the growing Stamford, Greenwich area. In addition, in Massachusetts for Aquarion, we have filed for an infrastructure capital, tracker to accelerate main replacement and other reliability improvements. We are proposing to use the deferred income tax flowback to fund these investments and mitigate the rate impacts to customers. Aquarion's capital expenditures are projected to total $100,000,000 this year, rising to $125,000,000 by 2021. Additionally, we expect Aquarion to continue to grow through future acquisitions of smaller water systems.

Aquarion had added about 11,000 customers through 2011 through 17 acquisitions totaling 67, separate relatively small water systems. All of these acquisitions were in Connecticut with one minor exception, the full purchase price of all of these acquisitions is currently reflected in rates. Aquarion has another four small water company acquisitions currently pending before the Connecticut utility regulators. Aquarion has an impressive track record for outstanding customer service. Its J.

D. Power scores consistently rank at the top of the water, utility industry and is viewed as one of the top places to work, in Connecticut. It's also a great fit for us and is supportive of our longer term growth and environmental goals. Before turning the call back to Jeff, I'll turn to Slide 27. In December, S and P raised its corporate credit rating on the Eversource system to A plus meaning that we are now two notches above any of our electric utility peers, holding companies.

Last month, Moody's also commented favorably on our Connecticut, rate settlement. Just to summarize on Slide 28, we're a company that has a very long history of delivering on our commitments and a very strong track record. Our earnings and dividend growth have outperformed the industry. And as Jim pointed out, our total shareholder return has significantly outperformed industry over many time periods. Our ability to reduce costs since the merger by 4% to 5% each year, while also at the same time providing improved and top tier service also sets us apart.

Our credit ratings have been raised repeatedly over the past five years, attesting to our strong focus on financial condition. We continue to invest in our electric transmission and distribution infrastructure And we are rapidly replacing older natural gas pipes and connecting new customers. And finally, we're a close partner with our states and communities executing on important clean energy initiatives. Our 8,000 talented employees, will work in lockstep with our nearly 4,000,000 customers, providing great customer service to ensure their and our future success. So I guess in recap, our major takeaways from this morning is we continue to work, on Siding and Building Northern Pass, for all the benefits that have been described, for what it brings to New Hampshire and the region.

We're confident in our ability to achieve our 5% to 7% long term earnings growth rate. We have a plan to do that. This will be achieved with an $11,000,000,000 capital plan, which is an 8.1% rate base CAGR, of which, just 1.5% is from Northern Pass. So we'll be have confidence that we'll be in the 5% to 7% range in either scenario. Long term electric distribution rate plans are now in effect in Massachusetts and expected to be approved in the near future in Connecticut for implementation in May.

We have a long track record of being an excellent utility system operator, effectively managing, controlling and, I'd say, reducing costs and providing very high levels of reliability. And we have a strong balance sheet, one that supports a tremendous amount of optionality to address new opportunities as they arise. And finally, we're not significantly impacted by tax reform. Our customers will reap the benefits of lower tax rates and our credit profile will remain strong. And additionally, we have no need to issue equity related to tax reform.

So with that, I'll turn it back over to Jeff.

Speaker 1

Thank you, Phil. And I'm going to turn it back to Vanessa just to remind you how to enter your questions. Vanessa?

Speaker 0

Thank

Speaker 1

Thank you, Vanessa. Our first question this morning is from Shar Pourreza from Guggenheim. Good morning, Shar.

Speaker 5

Good morning, guys. So Phil and Jim and everyone, let me just bring this point again. Without Northern Pass, you are comfortable with 5% to 7% growth with or without this project. So just in light of what you're seeing with the rate base jump on Slide 20, how does sort of the growth look like with Northern Pass? Because you seem to be comfortable without it at 5% to 7%.

So I'm kind of curious if Northern Pass does move forward, where do you sort of land within your growth rate? And then just as you think about your trajectory post how you're guiding, is there sort of enough projects for you to continue to be able to reiterate the 57% given sort of what seems to be perpetual infrastructure needs?

Speaker 4

Right, right. So I guess with anything, Shar, if there's many factors that influence we end up in the range. And certainly, with Northern Pass in there, that's more infrastructure investment. Without Northern Pass, that's a little less infrastructure investment. So just by definition, that would probably put you higher in any calculation range.

But you have capital plans. We've demonstrated the ability over many years to, add, or find what needed, reliability projects. I think I've been asked in the past, where's our list of projects to pull out? And my answer is always, there's not a list. It's really dependent upon the reliability needs of the region and we feel that we are in the best position to address them.

And we're good at identifying and moving those projects forward. So I feel confident that, that will continue, moving forward. We have a great team in place to do that. And as each of these projects goes in, it improves the reliability and helps lower cost to customers. So you have that, you have, an ability to control cost that moves you around in the range.

You could have rate case outcomes. Certainly, our, SET Massachusetts case and hopefully soon, we'll have approval in Connecticut certainly provides a nice strong consistent framework that you can count on. But there's always other rate decisions, talked about the FERC decision that's pending out there. So, so we're comfortable with for all those reasons that we'll be, in that range.

Speaker 5

Okay, that's helpful. And then

Speaker 2

just on

Speaker 5

Aquarian, Connecticut regulators clearly highlighted to us that, they were big fans of the transaction. So they touted it several times. There are roughly 31 regulated water utilities that are within the state. I'm kind of curious how you're thinking about inorganic opportunities when it comes to water within the state or outside.

Speaker 2

Yes, Shah, this is Jim. I'd just say that, we just closed on this transaction, two months ago. And, we continue to like the company that we acquired. We continue to like the water platform and the growth opportunities, whether it's rolling up, small communities or municipals, which they continue to do, looking at larger transactions, potentially, even public water companies that are out there. So I think that there's plenty of growth opportunity.

What you need to keep in mind is this is a company Eversource that I think has a long track record of doing deals that are smart for our shareholders. And so, we will be deliberate about what we do in terms of our next transaction, always with the shareholders' interest in mind. Very fragmented space, as you indicated. There's something like 50,000 water companies or entities nationwide. So a lot of opportunity for, rolling up, additional companies and creating some standardization and efficiencies.

Speaker 5

Got it. That's helpful. And then just let me if you don't mind me asking one last one is, thoughts on sort of the competitive process for wind going into the RFP without Northern Pass. So like what I'm asking is if Northern Pass ends up going to someone, one of your neighbors, for instance, because Massachusetts can't wait for New Hampshire, Does that actually indirectly position Eversource better for the next Massachusetts RFP? So I'm sort of you're sort of like the home team and you could be left without any skin in the game.

So how should we sort of thinking about this as an indirect read through the RFPs?

Speaker 2

Yeah, I think we've always claimed that, Northern Pass was not dependent upon any specific RFP. You get a sense from our comments earlier and statements that you read coming from policymakers in the region that there's a tremendous appetite for clean energy solutions in the region. We were thrilled to see the evaluation in Massachusetts conclude that the Northern Pass project was the most advanced and low cost alternative out of the 46 that were bid. So, that tells us that we've got a very attractive, project. There are about 20 major, permits that are necessary for a project like Northern Pass.

And we literally were down to the final two or three. So I think from a, including the two and a half years for a Canadian approval. So we have a project that is very advanced, very cost effective for customers. It was proven that way in the competitive solicitation. So there will be an opportunity, interest in receiving power over that line.

It's just that we need to, obviously make sure that we address the conditions or concerns that continue to exist in New Hampshire. Our goal would be that the rehearing would give us an opportunity to do that.

Speaker 5

Thanks very much guys. Appreciate it.

Speaker 1

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

Speaker 6

Hey, good morning, guys. Just I guess on Northern Pass again, just to follow on that. I mean, so are you guys is there going to be any waiting here for a final written order? And how quickly do you expect the reconsideration process to go?

Speaker 3

Yeah, Caroline, this is Lee. We would expect to file for reconsideration very soon. And the SEC essentially identified three areas We will file in our reconsideration with cures that we believe would resolve their deficiencies and that should take place over the next ten days.

Speaker 6

You mean when you actually file? Yes. Or when they respond? Sorry.

Speaker 3

They have ten days. Once we file, they have ten days to respond.

Speaker 6

Okay. So even if you guys file something kind of new with these cures, would they have to respond to that in ten days? But I guess the response could be something like, interesting, we'll continue to look at this. Or will they have to kind of give you a decision?

Speaker 3

Well, they do is they have to acknowledge whether they accept our reconsideration motion And or then once they accept the reconsideration motion, then they would put together a schedule.

Speaker 6

Okay, Got it. And then just back to, Lee, you mentioned that you were working with, and this is on, I guess, a gas pipeline sort of solution, that you were working with stakeholders in DC and New England. What sort of solutions are under discussion? And are you still focused on access Northeast? Or is there another kind of project you might be working on too?

Speaker 3

Yes, I mean, think the big picture on this one is that there is a growing emergence of leadership in the region. Obviously, ISO New England, but particularly key stakeholders inside of Massachusetts that realize that gas is not the enemy, gas is part of the solution. And if you want to ensure reliability, keep costs down and integrate renewables, then you want more gas, which is why we put those slides in there. As I'm sure you know, all you have to go do is look at Texas, which is the fastest growing economy in The U. S.

Energy usage is going up, costs are going down and carbon is going down. So, the integration of renewables, particularly wind and gas, provide that certainty about economic future of the region. So, in terms of projects, clearly it has to be a brownfield project. Our Access Northeast project was essentially mostly brownfield. We are looking at that to make that even more compatible and to have less of an impact on the environmental footprint that we have here in New England.

Speaker 6

But, I guess how do you get around the issue around how it gets paid for? How are you addressing the issues that you ran into in the past?

Speaker 3

There's two paths there. Obviously, there's the state pass inside of Massachusetts where you need legislation. We have ongoing litigation in New Hampshire that we believe could resolve that issue at the Supreme Court. Then there's always the federal path. It's a longer, more complex path, but there is a federal path through FERC and ISO New England to put in place a tariff that would ensure sufficient fuel supplies and reliability.

So, there's two paths there. The state path, I think, clearly is more preferable just from the timing standpoint. So, we continue to work both. Jim has met with FERC commissioners and FERC staff recently to discuss this issue. So, there's just this growing awareness that something has to get done.

We continue to help to provide really information that is educational, that really gets people to understand gas is part of the solution, not the problem.

Speaker 6

Okay. Okay, thank you. Maybe just one last minor one on I think Phil mentioned that you expected to pay 100,000,000 to $120,000,000 in federal cash taxes in 2018. How does that compare to your expected book taxes?

Speaker 4

For 2018, Carolyn?

Speaker 6

Yes. I'm just wondering, that seems low. I guess I would have expected your book taxes to be higher. And what's allowing you to defer federal cash? Do you guys have some sort of NOLs or credits that might be driving the difference?

Or maybe I'm just calculating it wrong.

Speaker 4

Just regular timing differences, but we expect the book to be higher, Caroline.

Speaker 6

Okay. All right. All right. Thanks very much.

Speaker 1

Thanks Caroline. Next question's from Michael Lapides from Goldman Sachs. Good morning, Michael.

Speaker 7

Hey guys, good morning. Two questions. One, if the New Hampshire Siding and Evaluation Committee does not select Northern Pass after the reconsideration process. How do you think about the use of that capital that frees up on the balance sheet given you wouldn't be making the CapEx tied to NPT?

Speaker 4

So Michael, I think what we've always talked about and I would still, say that we look first to redeploy that into infrastructure investments. We talked about that, over the last year or so in terms of if we had cash and, we use cash from the proceeds from the generation sales to invest in infrastructure with our aquarium water transaction. So our first look would be to develop additional regulated infrastructure.

Speaker 2

Michael, this is Jim. I think, as Phil's comments earlier mentioned that the four year plan, without Northern Pass, if you adjust out Northern Pass, it's actually a higher capital plan than what we had a year ago. So we found some projects there. I mean, if what you're getting at, would you possibly use it for a share buyback? That is obviously an option that we have.

We're not announcing it. We don't think that we need it necessarily to hit the 5%, but it's a nice tool to have given our extremely strong balance sheet and credit rating. So, I think we have a lot of optionality in terms of how we can deliver as we have in the past on our guidance.

Speaker 7

Right. And thank you for that, Jim. That actually falls into my next question, which was how do you think about what the right credit rating is for a company of your risk profile? How do you kind of go through that quantitative analysis of like, what's the optimal credit rating for Eversource?

Speaker 2

We don't actually, sort of have as a target an optimal credit rating. I think the recent experience of tax reform has sort of indicated that a lot of companies probably wish they hadn't levered as much as they had. We're fortunate to be sitting where we are. No equity issuance is needed going forward. What we have offered in the past is top tier financial performance.

And certainly, the total shareholder return slide that we have indicates that we've been able to achieve that. Coupled with that top tier financial performance is the number one financial condition, lowest risk in the industry. That's an offering that we continue to have and we've enjoyed and our shareholders have enjoyed having that balance of a strong financial condition along with the performance. So, clearly, do we need to be an A plus two notches removed from the next best credit in the industry? Probably not, but we've been able to sustain that while putting up the earnings dividend and share price growth.

So, I think so long answer there, but basically, we don't have a targeted minimum credit rating that we're striving for. We're going to continue to maintain a very strong financial condition while we put up good numbers.

Speaker 7

Got it. Last item, and I hope Jeff doesn't kill me for asking three instead of two. How do you Jim, do you and how does the Board think about the environment for utility sector M and A given a, higher rates and therefore higher potentially cost of debt b, the impact of tax reform and really what it's doing to your competitive balance sheet position versus other people's balance sheet positions And see kind of the pullback we've seen a little bit in the equity of utility stocks.

Speaker 2

Yes. I guess, it would be, situation specific. I think our Board, is thrilled with the outcome of the merger between Northeast Utilities and NSTAR. I think we've exceeded their expectations. I think the water acquisition, continues to pay dividends and is a creative transaction.

So, we have a balance sheet and a currency that will continue to be strong. But again, we have been a very, very disciplined player in that realm and will continue to be. It'll be, as I said earlier, transactions that are in our shareholders' best interests, rather than growing for growth's sake.

Speaker 7

Got it. Thank you, Jim. Much appreciated, guys.

Speaker 1

Thank you, Michael. Next question is from Paul Patterson at Glenrock. Good morning, Paul.

Speaker 8

Good morning.

Speaker 9

A lot of my questions have been answered, but just back to Northern Pass, what's the viability of Northern Pass without the Massachusetts RFP?

Speaker 3

Well, as Jim said earlier, Paul, this is Lee. We believe Northern Pass will be viable, because if you look at the region and the region's goals around carbon reduction and renewable energy. And here we are with essentially almost all of the pit permits complete. There's again some almost 20 permits we really need down to the FCC permit and the Army Corps of Engineer permit comes after that. So we'll have a project that will essentially be ready to go.

However, obviously, need the SEC setting. So we believe just looking at the Connecticut energy strategy and if you go look at the draft bills that are inside the Massachusetts Senate, all of them call for more hydro, more renewable energy. So, there'll be a home as we've said many times in the past for not the past, we just have to figure out what the timing of that is.

Speaker 9

Okay. So assuming that the NHSCC may not get back to you before the twenty seventh and you're and they go with whatever it is, the New England Clean Powerlink, whatever it is, they go with the alternative Massachusetts does. You guys would what would happen in that scenario? Would you guys continue with the would you start construction and everything if after that you got the New Hampshire site evaluation committee? In other words, if the NHSCC gave approval after the Massachusetts RFP had been selected, had gone with somebody else, what would would you guys proceed with construction or what have you or how would things proceed in that situation, I guess?

Speaker 2

Paul, this is Jim. Remember, we have a partner here in Hydro Quebec. Hydro Quebec has expressed publicly a number of times their interest in exporting more energy, in particular into the region. I think they would be interested in doing three Northern Passes. So, as long as they continue to sort of look to grow their bottom line by exports to New England, they would be interested in continuing with the project.

So, we can't sort of speak independently about what that would look like if Mass RFP went by the boards. Keep in mind that projects that are being considered for that mass, clean energy RFP still have a long way to go, including the beginning of process on the other side of the border that took us two point five years to get the Quebec approval. So, I don't think we need to sort of address that contingency now other than to say that we've got a project that's cost effective. We proved that in the Mass Energy RFP. And we have a partner in Hydro Quebec that's very committed and interested in exporting hydropower to our region.

So that bodes well for this project going forward.

Speaker 9

Okay. And then just finally, I apologize if I missed this. What was the weather adjusted sales growth, for 2017? Electric, Yeah, for electric. Yes.

Speaker 4

Yeah, it was slightly negative, you know, less than 1%.

Speaker 9

Okay. Thanks again, guys. Hang in there.

Speaker 1

Thank you, Paul. Our next question is from Greg Gordon from Evercore ISI. Good morning, Greg.

Speaker 8

Hey, Jeff. It's actually Durgesh on for Greg. Good morning.

Speaker 1

Hi, Durgesh. How are you?

Speaker 8

Good. Excellent. Hey, just we wanted to follow-up. And I think you stated this in your prepared remarks, but the rate base on Northern Pass is roughly $1500000000.01600000000.0 dollars right? And then the new rate base for 2020 with the tax reform and all the CapEx is roughly $2,000,000,000 higher.

So is it are we thinking about this the right way that basically the reason why you're still comfortable with your 5% to 7% is essentially you have a $2,000,000,000 higher rate base number on the back of CapEx and tax reform. So even if you don't go ahead with Northern Pass, you can still your 20 rate base numbers and your 5% to 7% earnings growth. Is that the right way to put it?

Speaker 4

Yes, it is. That's the correct way to look at it.

Speaker 8

Excellent. Thank you.

Speaker 1

Alright. Thank you, Durgesh. Next question is from Julien Dumoulin Smith from Bank of America. Good morning, Julien.

Speaker 10

Good morning. It's actually Josephine here. How are you guys?

Speaker 1

Hi, Josephine.

Speaker 10

So I know we've kind of talked a lot about the Northern Pass already, but I was just curious how much Northern Pass earnings if you do see is in the 2018 guidance?

Speaker 4

Well, what we said was, I think Lee mentioned in his remarks, if everything were to progress during the year, there might be a small amount of CapEx, 300,000,000 or so started in 2018. So there's probably a few cents related to AFUDC related

Speaker 9

Okay. To

Speaker 10

then just on could you comment on where ROEs are trending at Public Service New Hampshire and Yankee Gas after this cold winter, and your thoughts on going in for a rate case in those jurisdictions?

Speaker 4

Yes, so we have not, you know, announced any plans to go in. But we do have I mentioned in my remarks that in each of the jurisdictions we're looking to develop plans to how we're going to credit back the ADIT to customers. So that could be an opportunity that during that process, that those two things could be tied together. But we don't have plans there. I would say that, they're trending close to their, allowed.

They're probably, underperforming just slightly in both those areas. Neither one of those have decoupled, rates, that that would be something that we would look to do if we went in. Certainly in New Hampshire, where we're divesting of the generating assets, it makes sense at some point, in the not too distant future to make sure all the rates are coordinated that reflects the absence of generation.

Speaker 10

Got it, great. And then just one last question. I know it's late here already. Could you just comment on where your FFO to debt metrics are currently and kind of how much latitude there is for any transactions or returns of capital to shareholders?

Speaker 4

Sure. The FFO metrics for our rating and we deliver in the high teens, so that's where those metrics are. So, as Jim said, the balance sheet has capacity for optionality, and we could take advantage of that. But they're in the high teens above the target ranges.

Speaker 10

Got it. Okay, that's all on my end. Thank you very much.

Speaker 1

Thanks, Josephine. One more question, and I think he's still on the line. Is Praful Mehta from Citi still on the line? Think that's probably a no. So, all right, with that, we don't have any more questions.

Thank you for joining us this morning. I know we went over a bit. But if you have any follow-up, please give us a call this afternoon. Take care.

Speaker 0

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