Eversource Energy (ES) — Q2 2017 Earnings Call Transcript

Thank you, Sylvia. 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 1 of the slides that we posted last night, 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 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-K for the year ended December 31, 2016, and the 10-Q for the three months ended March 31, 2017. Additionally, our explanation of how and why we use certain non-GAAP measures is contained within our news release and the slides we posted under Presentations & Webcasts, and in our most recent 10-K. Turning to slide 2, speaking today will be Phil Lembo, our Executive Vice President and CFO; and Leon Olivier, our Executive Vice President for Enterprise Energy Strategy and Business Development. Also, joining us today are Jay Buth, our Vice President and Controller; John Moreira, our Vice President of Financial Planning and Analysis; and Christine Vaughan, our Treasurer and Vice President for Regulatory. Now, I will turn to slide 3 and turn over the call to Phil.

Thank you, Jeff. So today I'll cover second quarter and first half financial results, the status of key regulatory dockets, the status of our Aquarion Water Company transaction, and an update on our capital plan and several transmission projects. So, let's start with the financial results for the quarter in slide 3. Earnings were up $0.08 per share in the second quarter of 2017 compared with the second quarter of 2016. We earned $0.72 per share in the second quarter, compared with $0.64 per share in the second quarter of 2016. On the electric distribution and generation side, we earned $0.38 per share in the second quarter of 2017, and that compares to $0.32 in the second quarter of last year. This increase was primarily due to lower operations and maintenance costs. We also benefited from higher demand revenues due to warmer weather than the last year. Our transmission segment earned $0.30 per share in the second quarter of 2017 and this compares to $0.29 per share in the second quarter of last year. The primary driver of this earnings growth was higher transmission rate base, as we continue to invest in transmission projects that enhance the reliability of the New England power grid. I'll provide an update on key transmission projects that are driving this in a moment. The benefits from the greater transmission investment were partially offset by our annual reconciliation of costs and revenues from the prior year in accordance with FERC tariffs. This reconciliation takes place annually in the second quarter. On the natural gas distribution side, we earned $0.01 per share in the second quarter of 2017. This compares to earnings of $0.03 per share in the second quarter of the previous year. Lower earnings were due to several factors, milder early spring weather, high depreciation and higher O&M costs. At the Eversource parent and other, we earned $0.03 per share and this compared to relatively flat results in the second quarter of 2016. The primary driver was related to earnings from a long-held investment in a fund that invests in renewable energy projects. In total, through 2016, the earnings from this investment were pretty much breakeven. However, the market for renewable projects has matured and performed well over the past year, resulting in higher equity earnings in the second quarter from this investment of about $0.02 per share, and this compared to a small loss of about a penny per share in the second quarter of last year. So going forward, we don't expect ongoing earnings from this investment will have a material impact on the earnings. Turning to the second – turning from the second quarter to the first half results, we earned $1.54 per share in the first six months of 2017, compared to a $1.41 per share in the first half of last year. Improved results were due to higher transmission earnings, higher distribution revenues, lower O&M and improved results of the parent. For the full year, we continue to expect to earn between $3.05 and $3.20 per share, and for the long-term, we continue to project 5% to 7% EPS growth. From operations, I'll turn it to our regulatory activity and start in Massachusetts with the Massachusetts rate case and this is on slide 4. Hearings have concluded on the rate case, except for rate design topics. We expect a decision on the financial aspects of the case by the end of November, with the rate design decision around year end. New rates would be effective in January of 2018, and to date we've had no surprises in the rate review process.

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&A. Let's start with Northern Pass on Slide eight. The New Hampshire Site Evaluation Committee has completed more than 20 days of final evidentiary hearings for the project. Remaining hearings are scheduled to run through September and we've been quite pleased with how they have proceeded so far. We consider the New Hampshire SEC schedule to be supportive of the project receiving all of its approvals necessary to commence construction in early 2018. Hearings in June and July focus on the construction of the line, its impact on the region's power prices, and the considerable effort we are devoting to minimize environmental impact of the project. We believe our witnesses have made a very persuasive case as to why the project should be approved as proposed. It will bring billions of dollars of benefits to the state of New Hampshire, including an estimated $60 million a year in electric market savings, $30 million to $35 million a year in property tax revenues, $200 million over a 20-year period for the New Hampshire economic development and clean energy fund, and up to 2,600 jobs during the construction period. We have pledged to give priority to New Hampshire residents and businesses for construction work. In addition to the SEC permit, we need to secure a presidential permit from the U.S. Department of Energy. According to its website, the DOE expects to issue a final environmental impact statement in August. That will position the DOE to issue a presidential permit by the end of this year. We continue to expect Hydro-Québec to receive its final national and provincial permits for the Canadian portion of the project later this year.

Good morning. Thanks, Lee for that great update. Maybe, we could just talk a little about why – like why is it a full year delay for Northern Pass, how come not the spring of 2020? What equipment exactly is proving to be critical path items that extend the schedule at this point? And then also separately, how critical is winning the RFPs to keeping the project on track? My understanding is that they are – it's not critical. What happens if you lose? I understand there are other opportunities in these other states that will be coming next year, but how critical is it to keeping the project on track?

Sure. Just to get to the first part of your question, Mike. It's the HVDC converter technologies that are critical path along with the underground XLPE cables. These cables that have no oil and those two components are the critical path. And both HVDC converters and that particular kind of cable are in strong demand around the world. There are long lead times for both of those. Each HVDC converter, there is nothing on the shelf, so to speak, that you can use and back fit for a particular application. Every design is a completely unique design and it's just the time that we have gotten from the manufacturer ABB of the cable and HVDC converters, and it's really the limiting factor there. So it's just where we show up in the queue. It's really no more complicated than that. In regards to the project, whether we win the RFP or not, we are committed to build the project in H2. As I have stated, there are a lot of opportunities in all of these states for clean energy. If you look at where the region is and the precarious position of the region, absent a dedicated firm fuel supply, particularly natural gas, you are going to need more firm energy like Hydro-Québec has to offer into the marketplace. You probably, I'm sure, have seen where the largest nuclear operator in the region is now inquiring through ISO, what it would take to retire those assets. They haven't made a commitment to go do that. But I think in any case, whether that's done now or later, all of those assets time out and if the region wants to meet its goals around carbon reduction in class 1 renewable energy, as well as clean energy, you will have more hydro coming in from Eastern Canada and Québec to help satisfy that. So we're confident that the project will get built regardless of the outcome with this RFP.

Sure, Mike. This is Phil. The filing was done by consultation with the New England transmission owners, because we needed to have a way that we could bill customers, and given that the decision of the DC court vacated complaint one, we needed to have a rate on file that we could start billing our customers with. So this was a consultation and a filing with the New England transmission owners that was made in early June and, as you know, there's really not a forum or court at FERC at this time to review that. So we have not changed our billing until we move through that process. In terms of settlement, we've tried – we have – in each of these complaints there has been a settlement process and that's – the traditional FERC process is to start that we have not in any of those cases reached any settlements. So I guess, one could always be reached in the future, but I guess at this stage we are awaiting a quorum, so that the case be reviewed and we can move forward. Yes. I can say Aquarion is a private – they're a privately held company right now, but if you look at their track record over the last many years, there's about a dozen different smaller financially distressed systems that have been, let's call it, tucked in under the Aquarion umbrella. So that's about 11,000 additional customers. There's 230,000 customers now. Certainly, there are more of these types of systems out there, as you get aging infrastructure, more requirements for clean water, that type of thing. So just given that kind of track record, I would expect that to continue.

Thank you, Lee. And I'm going to turn the call back to Sylvia just to remind you how to enter the questions. Sylvia?

Thank you. First question this morning is from Mike Weinstein from Credit Suisse. Good morning, Mike?

Good morning. Thanks, Lee for that great update. Maybe, we could just talk a little about why – like why is it a full year delay for Northern Pass, how come not the spring of 2020? What equipment exactly is proving to be critical path items that extend the schedule at this point? And then also separately, how critical is winning the RFPs to keeping the project on track? My understanding is that they are – it's not critical. What happens if you lose? I understand there are other opportunities in these other states will be coming next year, but how critical is it to keeping the project on track?

Sure. Just to get to the first part of your question, Mike. It's the HVDC converter technologies that are critical path along with the underground XLPE cables. These cables that have no oil and those two components are the critical path. And both HVDC converters and that particular kind of cable are in strong demand around the world. There are long lead times for both of those. Each HVDC converter, there is nothing on the shelf, so to speak, that you can use and back fit for a particular application. Every design is a completely unique design and it's just the time that we have gotten from the manufacturer ABB of the cable and HVDC converters, and it's really the limiting factor there. So it's just where we show up in the queue. It's really no more complicated than that. In regards to the project, whether we win the RFP or not, we are committed to build the project in H2. As I have stated, there are a lot of opportunities in all of these states for clean energy. If you look at where the region is and the precarious position of the region, absent a dedicated firm fuel supply, particularly natural gas, you are going to need more firm energy like Hydro-Québec has to offer into the marketplace. You probably, I'm sure, have seen where the largest nuclear operator in the region is now inquiring through ISO, what it would take to retire those assets. They haven't made a commitment to go do that. But I think in any case, whether that's done now or later, all of those assets time out and if the region wants to meet its goals around carbon reduction in class 1 renewable energy, as well as clean energy, you will have more hydro coming in from Eastern Canada and Québec to help satisfy that. So we're confident that the project will get built regardless of the outcome with this RFP.