Eversource Energy (ES) — Q2 2022 Earnings Call Transcript

Great. Thank you very much, Alexis. Good morning and thank you for joining us. I'm Jeff Kotkin, Eversource Energy's Vice President for Investor Relations. During this call, we'll be referencing slides that we posted yesterday on our website. And as you can see on Slide 1, 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. These factors are set forth in the news release issued yesterday afternoon. 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, 2021, and our Form 10-Q for the three months ended March 31, 2022. Additionally, our explanation of how and why we use certain non-GAAP measures and how those measures reconcile to GAAP results is contained within our news release and the slides we posted last night, and in our most recent 10-K and 10-Q. Speaking today will be Joe Nolan, our President and Chief Executive Officer; and John Moreira, our Executive Vice President and CFO. Now, I will turn to Slide 2 and turn over the call to Joe.

Thank you, Jeff, and thank you everyone for joining us on this call this morning. I hope that our investors on this call are having a good summer and have plans for some time off after earnings season concludes in another couple of weeks. We are enjoying a glorious summer so far in New England, with many sunny days along our shoreline and our mountains. If you haven't made a trek here this summer, we urge you to do so and support hundreds of thousands of businesses. Over the past few weeks, with the longest sustained heatwave in Eastern Massachusetts in about a decade, our electric system has operated very well, and it has all year. Through June, the average number of months between power interruptions continues to place our reliability in the top decile of the electric industry, and our relatively short average duration of outages continues to place us in the top quartile. This is strong evidence that our investments in infrastructure to enhance reliability have been a significant benefit to our customers. Response time to natural gas service calls, a key safety and performance metric for our gas distribution business, continues to be excellent. Turning to Slide 3, about two weeks ago, we posted our 2021 Sustainability report and linked it to our Diversity, Equity, and Inclusion report. Our DEI report is new this year. Over the past year, a number of our investors requested that we provide additional transparency about our diversity, including providing more detail about statistics around hiring, promotion, and retention rates, areas of our organization that are a high focus for us. We decided that the best way to provide investors and others with this information is to create a separate report that highlights the significant and increasing diversity among our employees, our management, and our Board. We welcome your feedback on both the DEI and our Sustainability reports. The new Sustainability report highlights our successful accomplishments last year in a variety of areas. We continue to enhance the report and again have third-party validation of our Scope 1 and Scope 2 emissions. The report focuses, to a major extent, on Eversource's very significant efforts to support our state's goals to reduce greenhouse gas emissions by 80% to 85% by 2050. From a clean energy perspective, Slide 4 captures three of our initiatives in this area. Our battery storage project in Provincetown on Cape Cod was commissioned in the second quarter of 2022 and almost immediately showed its value when it helped avert an outage for approximately 5,000 NSTAR Electric customers. We have filed our first application under the most recent legislative authorization for regulated company's solar generation investment. We are seeking approval of three different projects, all of which would combine solar with battery storage. They would be located in Brockton, Warren, and Yarmouth in Eastern Massachusetts. Altogether, it's expected to cost an estimated $31 million to build. We continue to progress on our unique geothermal network project that Massachusetts regulators approved in the most recent NSTAR Gas rate review. The project will be located in Framingham, Massachusetts. It will connect 140 apartments, homes, and businesses to a geothermal system that will provide both heating and cooling. Customer receptivity to the project has been very strong, with nearly 85% of those along the route signing up for the pilot. We continue to expect the project to be operational in 2023. Turning to offshore wind on Slide 5, I want to update you on the progress we have made on our strategic review of our offshore wind investments. We've been working closely with Ørsted on developing the marketing materials that will be disseminated to potential buyers for our 50% interest in our joint venture. We continue to target an outcome for this review by the end of this year. Thus far, we have had a very high level of interest and expect a robust sales process. We recently kicked off our buyer outreach and have had preliminary discussions with potential buyers and expect that process to continue. Key materials have been developed, including non-disclosure agreements, confidentiality memorandums, independent engineering documents, and other materials. In the meantime, we continue to make steady progress on our three projects. South Fork is the first project to enter construction. We are virtually complete with the sections beneath the public roads in East Hampton, New York. We are now progressing rapidly on the onshore sections in the railroad right-of-way on the substation where the 130-megawatt project will connect. As a reminder, the offshore portions of South Fork will be built in 2023. We continue to expect the two larger projects, Revolution Wind and Sunrise Wind, to be fully permitted in 2023 and to be in service in 2025. On July 8, the Rhode Island Energy Facility Siting Board issued to Revolution Wind a decision and final order approving the project and granting a license to construct and operate. As a reminder, Revolution will supply a total of 704 megawatts to Rhode Island and Connecticut and tie into the New England grid in North Kingstown, Rhode Island. As you can see on Slide 6, we've also made progress on the procurement side with 82% of the three project costs locked in, up from 80% in May. The demand for offshore wind generation continues to grow in our region. Rhode Island recently enacted legislation that requires a solicitation by October of this year for an additional 600 to 1,000 megawatts of offshore wind. Another much larger offshore wind RFP for up to approximately 4,600 megawatts was issued this week by New York. Including projects already awarded, we are now looking at approximately 18,000 megawatts of offshore wind authorizations from New York and the states of Southern New England. We are confident that this level of procurement will attract wide interest in our wind investment since we continue to believe that the ocean tracks that we share with Ørsted are about the most attractive in North America due to the high average wind speeds, moderate depths, proximity to roads, and incredibly deep public policy support. New legislation that passed in the Massachusetts House and Senate last week should also further support a robust sales process. As you can see on Slide 7, there were several elements in that Bill that should help solidify Massachusetts' effort to stay in the forefront of offshore wind development in the United States. They included an affirmation of the state's commitment to contract for 5,600 megawatts of offshore wind by mid-2027, modification of the bidding process to encourage more competition among developers, and incentives to increase the manufacturing and assembly of offshore wind components in Massachusetts. There were also provisions to enhance the sale and leasing of electric vehicles in the state, build more energy storage, and develop grid modernization plans that would support electrification as a key path to decarbonization. There was also a pilot program that would allow up to 10 communities in the state to restrict fossil fuel installation in new buildings. Healthcare and research facilities, which have proliferated across Massachusetts, would be exempt from the pilot, as would certain communities with housing affordability challenges. Thanks again for your time, and I will now turn over the call to John Moreira.

Thank you, Joe, and good morning, everyone. This morning, I will review our results for the second quarter of 2022, discuss recent regulatory developments, and review our 2022 financing activity. I will start with Slide 8. Our GAAP earnings were $0.84 per share in the second quarter of 2022 compared with earnings of $0.77 in the second quarter of 2021. Second-quarter results for both years include $0.02 per share of an after-tax cost associated with acquisitions, primarily related to the assets acquired from Columbia Gas of Massachusetts. Excluding those costs, we earned $0.86 per share in the second quarter of 2022 compared with earnings of $0.79 per share in the second quarter of 2021. For the first half of 2022, we earned $2.13 per share on a GAAP basis compared with earnings of $1.83 per share in the first half of 2021. Excluding charges related to the acquisition and a Connecticut storm penalty last year, we earned $2.16 per share for the first half of 2021 compared with earnings of $1.94 per share in the first half of 2021. Looking at some additional details on the second-quarter earnings results by segment, starting with our electric transmission segment, which earned $0.44 per share in the second quarter of 2022 compared with $0.40 per share in the second quarter of 2021. Improved results were driven by a higher level of investment in our transmission facilities. Our electric distribution segment earned $0.37 per share in the second quarter of 2022 compared with earnings of $0.35 per share in the quarter of 2021. Improved results here were driven largely by higher revenues, lower pension costs, and storm restoration costs, partially offset by higher costs related to property taxes, depreciation, and other employee-related expenses. Our natural gas distribution segment earnings were $2.00 per share in the second quarter of 2022 compared with earnings of $0.01 in the second quarter of 2021. Improved results were largely due to higher revenues and lower pension expenses, partially offset by higher operating and maintenance costs, property taxes, interest expenses, and depreciation. Our water distribution segment earned $0.03 per share in the second quarter of 2022, the same level as we earned in the second quarter of 2021. Results for Eversource parent and other companies improved by $1 million in the second quarter of 2022 compared with the second quarter of 2021. Excluding the acquisition and transition costs I mentioned earlier, the results include after-tax gains on clean energy investments, which increased by $0.02 per share from last year's levels and were largely offset by higher interest costs on long-term and short-term debt. Now that we have the first half of 2022 behind us from an earnings perspective and have a bit more line of sight on the second quarter of 2022, we have narrowed our non-GAAP earnings guidance for the full year to $4.04 to $4.14 per share from our previous range of $4.00 to $4.17 per share. Before moving on, I'm pleased to announce that as of the end of June, we have fully transitioned the remainder of Eversource Gas of Massachusetts business systems off of the legacy NiSource system and onto the Eversource platform. Overall, we could not be more proud of the conversion process. It has gone extremely well since we closed the transaction in the fourth quarter of 2021. We have converted approximately 300 business processes over to Eversource, including the most recent move onto a new customer information system. Feedback from both EGMA customers and employees has been very positive, and our operating and financial metrics have consistently met or exceeded our expectations. As a result, transition-related costs for this transaction will be minimal next quarter. We are very appreciative of the great support we have received from the NiSource team during this transition period. Turning to longer-term earnings, as you saw in our news release and can see on Slide 9, we are reaffirming our long-term EPS growth rate in the upper half of 5% to 7% range. On Slide 10, we also reaffirm our $18 billion five-year regulated capital program that we discussed during our February earnings call, including our $3.9 billion regulated capital investment projected for this year. As Joe mentioned, we expect that by 2026, the last year of our current five-year forecast, our incremental investments required to offset the loss of the offshore wind earnings contributions that would have been in place, we estimate that that will require approximately $3 billion of investments. More to come on this front soon. In both February and May, we noted a couple of additional areas where we expect the need for incremental investment over our current five-year forecast period to enhance reliability, customer experience, and connect clean energy resources efficiently. Turning to Slide 11, we have provided a status update on AMI for both NSTAR Electric and CL&P. At this time, regulators in both Connecticut and Massachusetts are actively working through dockets with decisions expected later this year. Briefing has been completed in Massachusetts, and we expect a decision towards the end of the year. In Connecticut, PURA held hearings earlier this month to address further questions that the department posed about an AMI rollout. We also expect PURA's AMI review to be completed by the end of the year. Separately, as we mentioned on our first quarter earnings call, NSTAR Electric filed an application with FERC in March on an innovative recovery structure to help promote offshore wind development off Massachusetts. The application involves Park City Wind, which is an 800-megawatt Avangrid project that was selected a couple of years ago as the winner of Connecticut's most recent offshore wind RFP. Park City will connect into the 345kV system where we are already planning some upgrades to meet rising electric load requirements. By working on the two projects together, we were able to reduce costs for customers. In total, the incremental upgrades would be about $200 million, for which about $150 million of that will be collected from Park City with FERC-based returns. FERC approved our application at its June meeting. We expect there will be other opportunities to emulate this type of offshore wind transmission interconnection agreement going forward. ISO New England is already reviewing another project that expects to tie into the New England grid through Cape Cod. We have discussed previously that including Park City, there are probably about $500 million of regulated transmission investment needs on Cape Cod to efficiently connect offshore wind that is not reflected in our current $18 billion capital forecast. We expect other significant investment needs to arise in the near future in both electric distribution and transmission segments since our states view renewable power as a critical means of reducing greenhouse gas emissions related to space heating and transportation. On the regulatory side, we have one general rate review well underway and another one about to be filed. A summary of those cases is shown on Slide 12. Hearings in the NSTAR Electric rate review concluded just last week, and we will be entering the briefing phase soon, with a decision expected on December 1 of this year and rates effective January 1 of 2023. We feel very good about the strength of our case as well as our proposals to enable the Commonwealth's clean energy goals. Briefing will take place throughout the month of September. On July 1, Aquarion Water of Connecticut filed a letter of intent for its rate review in about ten years. Key elements of the three-year plan are shown on this slide. We expect to file the actual application in August. Aquarion Connecticut's regulatory ROE was about 7.8% during the 12 months ended March 31, 2022. The company's infrastructure investments have significantly increased over the past several years to enable water service reliability for its customers. Turning to recent financings, we issued $1.5 billion of two-year and five-year parent debt in late June. Proceeds were used to reduce short-term debt. The relatively short average maturity of the senior notes is due to our anticipation of a successful sale of our offshore wind interest. In terms of the equity issuances, as you can see on Slide 13, we launched our $1.2 billion at-the-market program in the second quarter of this year, and to date have issued nearly 1.4 million shares at a weighted average price of $91.98 through July. We also have issued approximately 640,000 treasury shares this year to fund our dividend reinvestment and employee plans. We have received a number of inquiries from investors regarding our pension obligation. Let me start with an overview of our plans' performance last year. Our retirement plans earned approximately $1.25 billion, which amounts to a 24% return on plan investments. We contributed about $180 million into the plans last year. This resulted in the funded status of our pension plans increasing over the course of 2021 from about 79% to nearly 100%. The impact of pension expense on our earnings is mitigated by the fact that we have adopted a smoothing of actuarial gains and losses over the average participant future years of service. It's further mitigated by our pension trackers in place at our three Massachusetts electric and gas distribution companies and our transmission segment. Additionally, much of our pension expense is capitalized into our capital projects and doesn't affect our earnings. Lastly, our qualified pension plan has been closed for new participants for well over a decade. Less than half of our pension expense actually affects earnings. The expense is lower this year, due in large part to the strong returns we realized last year and slightly higher discount rate. At this time, it is unclear whether pension expense will be a positive or a negative factor for our 2023 earnings. While it is unlikely that in 2023, we will experience the same returns as we realized in 2021, the discount rate that we will use for 2023 is expected to be significantly higher than the rate we are using currently, and that could help lower pension expense next year. As a reminder, our expected long-term rate of return assumed in our pension investments is 8.25%. Thank you very much for joining us this morning, and now I will turn the call back over to Jeff.

Great. Thank you, John. I'm going to turn the call back to Alexis to remind you how to enter your questions. Alexis?

All right. Thank you, Alexis. Our first question this morning is from Shahr from Guggenheim. Good morning, Shahr.

Joe, I appreciate the color on the process. But can we maybe dig a little deeper into where we are right now? Did you get any imbalance since the first quarter update? And I know it's early, but what's kind of your preferred structure? So if the leases and projects do get split up, would you kind of be willing to do a COD and take the construction risk for Sunrise and Revolution, so like a build on transfer? Or when you're thinking about an exit, you really want to exit and not take any development risk at that point.

Good morning, Shahr. It's great to hear your voice. And I hope your summer is going well. So a couple of pieces to your question. First off, we've had 12 additional inbounds, folks that are interested in the properties. I will tell you that initial discussions, folks are not afraid of construction risk. There's no concern about that. There's a very healthy, excited atmosphere for wind as you might imagine. Since the start of this year has been nothing but positive for wind; we started with the New York Bight leases, then the recent Rhode Island RFP news, the New York RFP news, and obviously now this Washington deal, which is very exciting. So we feel really good about it. We don't think we're going to have to do anything different in the sale process. It's been very well received.

Got it. Perfect. And then just lastly, there's been a healthy amount of debating around how you think about inorganic opportunities. Can you maybe just provide some thoughts around how you think about diversifying outside of New England, whether there is really any interest around acquiring electric operations or your strategic priorities outside of your footprint is really around the water business? Thanks.

Yes, great. So first of all, just so you understand, we are laser-focused on the wind piece right now; that's what we're focused on. That's where we're spending our time. The water business, we love the water business. It's extremely fragmented. I think you know that. When we were making acquisitions, they were in the 10,000 customer range, 5,000 to 10,000. That's what we feel very, very good about. But there are really virtually no independent publicly traded water companies in New England that really are left. So the focus has been on municipally-owned water systems. Aquarion has a phenomenal reputation in the water space. We think we have a great platform for us to grow, and also some of these municipal systems in the region that are facing some capital constraints as they have to look at upgrading their systems. I just want to make it very clear that we have no interest in expanding our natural gas footprint; that is not on our radar at all. With regard to the electric side, while there are potential customer benefits from a larger footprint, it would be very difficult for an acquisition to compete with investments in our own systems in Massachusetts, Connecticut, and New Hampshire. There's no question that increased electrification will necessitate significant increased investment in our distribution and transmission systems in our substations to handle increased heating and electric transportation loads. Those investments will require significant capital. I think you know that our company history indicates that M&A is infrequent but highly effective when it occurs. Mergers that created NSTAR about 25 years ago, Eversource 10 years ago, and added Eversource Gas in Massachusetts two years ago were beneficial to customers, accretive to our shareholders in the first 12 months after closing, increased our EPS growth, and lowered our risk. And that's what I want to emphasize. We are about derisking; lower risk. So we'll apply all these same principles to any future opportunities that we would pursue, Shahr.

Terrific. That's a lot of good color. I appreciate it, Joe. Have a good day. Bye, guys.

Yes. Thank you.

Thanks, Shahr. Next question is from Neil Kalton from Wells. Good morning, Neil.

Yes. Hi, everyone. Thanks for taking the question. So Joe, you mentioned the news out of Washington. And you guys have had the advantage over others having a day to kind of evaluate this. We would love to get your take on what you see in there that could be helpful to Eversource, particularly on the offshore wind side. And is this something, as you're looking to kickoff the sale process, would you need to wait and see this actually pass before moving forward with that?

Yes, I don't think we need to wait for it to pass. I believe the Inflation Reduction Act will progress, and there's a lot of support and discussions surrounding it in Washington. The enhancements to the renewable energy tax credits are likely to create significant value for our projects. This Bill is 725 pages long and very detailed, and we are reviewing each part thoroughly. All indications we have seen from the Bill are very favorable for our business and for all renewable businesses, including wind. Therefore, we are optimistic that this will benefit us. However, this won't cause us to pause our efforts regarding our wind exit.

Okay. And one quick follow up. And I don't know if you mentioned this in the remarks, so I apologize if you did. But any sort of sense on how long this process will take to play out. It seems like there's pretty healthy interest. Does that suggest that this could be fairly quick or just any thoughts on that?

I feel very strongly that we will have answers in this year, in 2022. I would expect the fourth quarter, we would be able to share a lot more color around it and hopefully execute shortly thereafter. But realistically, we wouldn't execute in 2022. But we will have a lot of clarity around the buyer.

Perfect. Thank you.

Yes. Thank you.

Thank you, Neil. Our next question is from Nick Campanella from Credit Suisse. Good morning, Nick.

Hi. Good morning, everyone. Thanks for taking my question. So I guess just in your prepared remarks, you kind of just talked about, you issued some hold-co debt that had a little bit of a shorter tenor and it sounds like the offshore proceeds will go towards potentially paying down that first, if I'm hearing you correctly. So that's about like I think $1.5 billion of debt. How do you just think about use of proceeds and access to that? You talk about replacing offshore earnings in the out years? Is there kind of further debt paydown in the near term with capital deployment in the long term? Can you just kind of help us understand that more?

Sure, Nick. This is John. So if you look at some of the upcoming maturities that we have at the holding company, we have pretty sizable maturities that will kick in in early, mid, and late 2023 in the billions of dollars. Those will mature around the time that this transaction will happen.

Okay. And then I guess just on the Inflation Reduction Act, it sounds great for the industry in general. How are you thinking about the potential impact of like an alternative minimum tax to your business?

The Bill has just been released for 24 hours, so we are in the process of analyzing it. The team is evaluating what it means, but it's a bit unclear at this moment. We will examine it further. If there is a significant expense related to the minimum tax, that will be a factor to consider. However, we are still in the review stage.

Got it. Yes, I appreciate it's really early. And then one more if I can just squeeze it in, the NSTAR rate review, just how do you feel about kind of ultimately being able to bring a settlement to the table? Is that something you're actually trying to work towards? And if you could, just what's the timing there?

Sure. We just finished the hearings and need sufficient information to initiate any settlement discussions. I'm not dismissing it, as I believe settlement is definitely a possibility. Considering our history, we tend to prefer settlements over fully litigated proceedings. I'm optimistic about that.

All right. Thank you so much. Have a great weekend.

Thank you, Nick.

Thanks, Nick. Next question is from Jeremy Tonet from JPMorgan. Good morning, Jeremy.

Hi. Good morning. This is actually Rich Sunderland on for Jeremy. Thank you for taking our questions today. Maybe starting off with the Massachusetts climate legislation, can you speak to some of the distribution system upgrades that might come out of that legislation, or any other enhancements you're looking at on the distribution side?

Yes. Thanks, Rich. We've got, as you know, a significant capital plan around that. We have been working towards these investments, whether it's AMI or other upgrades in interconnection. So that legislation really dovetails nicely with what our existing plans are. So it's nothing but positive from our standpoint in terms of dollars. Again, that is also heading to the Governor's desk. We're hoping that gets signed and has no changes before Sunday. Sunday is the deadline. So again, these are very new; these are only days old.

Understood. I appreciate the color there. And maybe similar question, but on the transmission side, thinking about the coming offshore wind in the region, you spoke about the Park City upgrades. How do you think about the timing to scope out some more of these opportunities? Is this something that could evolve over the next year or two, and particularly thinking about all the wind kind of coming down the runway here that you spoke to in the script?

Yes. I will tell you, I've been pleasantly surprised. One of the reasons we've had this kind of point of inflection around our wind business is the fact that there's such a significant need for interconnections on our service territory. This is right in our regulated business, which is our sweet spot. I think that every year or every six months, you're going to begin to see a greater and greater clarity around folks that want to interconnect. We are in a, what I would say, the crown jewel of service territories. We are in the load centers here; whether it's in Connecticut or Massachusetts, this is where the load is and that's where folks want to interconnect. So I think that every time that we get on this call and we're talking with you and meeting with you, I think we're going to have more and more clarity and more information around transmission opportunities that are taking place for renewable projects.

Got it. Thank you for the time today.

Thanks for the questions. Next question is from Steve Fleishman from Wolfe. Good morning, Steve.

Hi. Good morning. First question is just, Joe, I think on the first quarter call, you said that you'd be able to ultimately get back to the earnings you were going to get from the offshore wind with the proceeds from this sale? Are you still confident that that is the case?

Yes, we are very confident, Steve. Yes.

Okay. And then secondly, just on the pension, John, I think you mentioned something for 2023, not sure if it will be plus or minus. Is that versus 2022 pension expense, or is that pension expense or income overall when you say that?

Steve, it would be a comparison to 2022. Obviously, our returns right now are lagging behind what we earned in 2021, which is the basis for '22 expense. But the significant change is the discount rate. So if I were to size the funded status of that plan today, we would move from 100% to something north of closer to 120%. So even though returns might come down a bit compared to what we earned in 2021, the movement in the discount rate could far exceed that impact.

Okay. And then one last question just to clarify the use of proceeds. When we consider the expected use of proceeds from the outcome of the offshore wind sale, how should we view the allocation between debt paydown, regulated investments, and other options?

Sure. Once we receive that cash, our primary focus will be on paying down some short-term obligations, especially considering we have several maturities due in 2023. This will be our immediate priority. Additionally, it allows us to reinvest in further regulated wind projects, which are necessary for transmission interconnections and to meet the load demands of our infrastructure as we move towards electrification. We are currently analyzing this situation and will provide updates in our usual timeline. Typically, we revise our forecast in February, and the team is already working on that analysis.

Okay, great. Thank you.

Great. Thanks, Steve. I appreciate it. Next question this morning is from Insoo Kim from Goldman. Good morning, Insoo.

Hi, Jeff. Good morning and happy Friday. First question on the ATM equity within amounts you issued so far, any additional color on roughly how much more you're contemplating issuing in 2022, or do you think like this might be kind of until we get the clarity on offshore wind stuff?

Right. So, Insoo, it's not a race to the finish line. So we will continue to be very opportunistic and take advantage of our stock price. And that's exactly what we did. We issued the 1.4 at close to $92 a share. It's difficult for me to answer that question without knowing where we'll be. But if we have an opportunity to go to market in the next five months, we'll do so.

Okay, got it. And then going back taking the question on the M&A side, you've made it pretty clear that the focus is probably on water. Obviously, a lot of municipal acquisition opportunities I think exist, but would you also potentially be open to looking at publicly traded water companies as well if there's one?

Yes, absolutely. If it was a strategic fit, we're not going to go across the country. It's going to have to make sense for us. It's going to have to be in the general area. So yes, we would absolutely look at that. They are far and few between, as you know, but certainly, water is very attractive to us.

Got it. Thank you so much.

All right. Thank you. Next question is from Durgesh from Evercore. Good morning, Durgesh.

Hi. Good morning, Jeff. Just on the water M&A topic, Joe, just want to pick your brain on this. So one of your peer water utilities I guess announced an agreement here north of $1 billion or close to $1 billion in Bucks County, Pennsylvania. You have experience running the Connecticut water system for several years now. So are you outside of the publicly traded water companies. Could we see you get into the municipal market in neighboring states on the water front?

Absolutely. They would be in neighboring states, as you mentioned, where we are already conducting business. We believe that this is the next path forward. It's becoming evident that municipalities and some water systems are facing capital constraints, leading them to consider transferring operations to a professional operator. This is likely what occurred in Pennsylvania, where they decided to hand over operations to us, a highly capable operator. I believe we are recognized as such by the municipalities, which is why they chose to make that move. We are experiencing similar trends in this region, with municipalities reaching out to us for our expertise. These opportunities may be small, as transactions in the range of $80 million to $100 million for 9,000 to 10,000 customers or even for municipal treatment require significant effort. However, they are appealing to us because we have the necessary infrastructure and a skilled management team at Aquarion to leverage these situations effectively. Our track record speaks for itself.

Got it. I appreciate that color. And then, John, I had a quick clarification. In your comments, you mentioned the $3 billion in investments in offshore. That's sort of the current plan. Is that what you were referring to on the offshore front, or was that sort of the regulated CapEx hole you needed to fill to make you square on the offshore earnings? Can you just clarify that?

Sure. The $3 billion would be the incremental investments that we would need to replace the earnings once we divest of the offshore wind. That aligns with the guidance that we gave you back in February, where we said that we would expect our wind business to contribute between 6% to 8% based off of the regulatory returns for the first full year of operations, and that is 2026. So if you do the math, that puts you at about $140 million, and the $3 billion is what it would take from a regulated standpoint to replace those earnings using a 50-50 cap structure.

Got it. So $3 billion in regulated investments would equal the earnings loss from offshore?

That's correct. On today's call and what we've been disseminating is we're well on our way to reaching that. We're between the AMI and the offshore interconnection into our system. That's about $1.5 billion of that number. Just given the opportunities that Joe has mentioned and we were seeing happen to materialize just on the whole distribution system and transmission system to accommodate the load expansion to bring in further renewable resources to address decarbonization and electrification, we feel very confident that we can reach that level of investment.

Excellent. Thank you for the detail. Very much appreciated. Have a great day, guys.

Thank you, Durgesh. Next question is from Andrew Weisel from Scotia. Good morning, Andrew.

Hi. Good morning. Thank you. If I can first follow up on that last question, it sounds like you're expecting to get at least half if not all of that $3 billion; you sound more confident. What would that mean for EPS growth? The EEI slides, you said you'd expect to be higher than 5% to 7% thanks to offshore. So if you are able to backfill the wind earnings, does that mean you grow earnings faster than 7%?

Well, we're not here today to update our guidance. What we're seeing is that the $3 billion investment would replace the earnings that we would lose from the wind. So I think it's a little premature.

Okay, fair enough.

But Andrew, certainly it would be additive to our core business growth from where we are today.

Okay, got it. Then from the customer perspective, the cost of offshore wind obviously won't go away if the owner changes. So how do you think about affordability impacts if you're backfilling the CapEx with projects in the rate base, in addition to those offshore projects still moving forward?

I think if you look at some of the pricing out there right now for energy, you'll see that wind is very, very competitive and certainly is less costly than the options that are available right now in the marketplace. So I don't think that cost is going to be a barrier around wind.

And then, Andrew, what I would remind you of the $500 million that we've discussed on the call today as it relates to offshore wind interconnection, that's paid by the developer and not socialized.

Okay, that's a good reminder. Thank you. Then one last kind of maybe funny question in terms of the potential buyer, are there any requirements or preferences for the buyer to be a U.S. domiciled company, or could it just as easily be an international buyer?

No, there are no restrictions on that. It could be an international buyer. It could be a local buyer, whatever.

Okay, great. Thank you.

Thank you, Andrew. Our next question is from David Arcaro from Morgan Stanley. Good morning, David.

Hi. Good morning. Thanks for taking my question. I was wondering if you could give an update on how conversations have gone with credit rating agencies, basically any chance that you're seeing for a lower debt threshold after the sale. And what is your thinking right now just around maintaining your ability to hit the thresholds that you've got in place right now, given that you've got quite a bit of spending on the utility CapEx that you'd be adding to the plan?

Sure, David. So I'll tell you that, and I'm sure you're fully aware of this, that we have completed our annual review with all three agencies and overall great, great outcome. As to how it relates to the Moody's getting to a 15%, we do have a plan. Obviously, the use of the proceeds that we would get from offshore wind would contribute very nicely and move the needle. The equity issuance that we've discussed, in total and in addition to the AMI, the ATM, we also have about $600 million of treasury shares. So you're really looking at about $1.8 billion that we're looking to execute. That metric has been negatively impacted, quite honestly, by the high level of the first storm cost that we're carrying. We have plans in Massachusetts to commence recovery, certainly with this rate case. As you know, in Connecticut, we do have a stay out that we can't change base rates, including the storm costs any earlier than January 1, 2024. So we were hopeful that over the next coming year or two, those recoveries will be in place. As I discussed in my formal remarks, the status of our pension fund, and obviously because we expect to be overfunded, quite honestly, that we have the ability to avoid any contributions for a couple of years. The timing of rate adjustments, we have one kicking in 2023, early 2023, for our open case that we have for NSTAR Electric. So we do have a path to get to enhance FFO to debt. So I feel very confident that we'll be able to get there.

Great. That's really helpful. Thanks for that color. It sounds like there are some clear cash flow improvements coming. Should the baseline kind of target or assumption be that you don't see the need for any more equity in the plan even to hit that $3 billion or to fund that $3 billion of incremental utility CapEx?

That will happen over time. Once we finalize the offshore wind deal, we will reassess our equity requirements and align them with the timing of our additional capital spending.

Great. Yes, that's fair. Thanks so much.

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

Hi, good morning. Thank you for the update. I have a question regarding the Massachusetts climate legislation. What are your expectations for the Governor's actions given the limited time? I'm curious if you have any insights or indications about the direction this may take.

Yes. Good morning to you. He is favorably disposed to sign this legislation. I don't anticipate anything that is standing in the way of that. He might have a couple of messages he sends back. I think he realizes that it's not a time, and I don't think he wants to jeopardize what he considers to be part of his legacy. I think we're in good shape on that Bill.

Okay. So that's what I was wondering. In the slide, it says, potential seeking modifications. I'm just wondering with the session sort of ending, I guess that would be kind of difficult to do, I would assume. Is that the right way to think about it?

That's correct. He can send back some messages. If they're not in formal session, it makes it difficult, obviously, to override that. But that doesn't jeopardize the entire Bill. These would be kind of individual, I'd say, pocket type of changes, one-offs that wouldn't impact the overall Bill.

Okay, I understand. So, he has the ability to make modifications. I see what you're saying. I thought perhaps he wouldn’t require the legislature's response for those changes to take effect, if I understand correctly?

That's correct. It's not one of these total up or down. He can come in and make surgical changes, if he felt that strongly. I will tell you that I think you've got a Governor here who is very mature and really understands and has a relationship with the legislature. So he'll be very thoughtful, very deliberate about anything that he does around this Bill. I think anything he sends back, he probably has already passed through the legislature to make sure that everybody's on the same page.

Great, really appreciate it. Thanks so much, and have a good weekend.

Thank you.

Thanks, Paul. Next question is from Julien from Bank of America. Good morning, Julien.

Hi, team. Thanks so much for taking the time and the question. So just checking in, if I can just try to elaborate a little bit, and I know you guys are preliminary on this $3 billion number here, but a little bit more on the timing in the pieces here. Right? When you talk about like $1.5 billion tied to the offshore transmission, for instance in part, what's the timing there? I know we've been talking about sort of that would displace the '26 offshore, but is the idea that that $1.5 billion would be fully deployed by that point in time? And then similarly, my impression, but tell me what the specifics are, the other $1.5 billion there, how much of that is contemplated, for instance, AMI? And how much of that AMI would be done by '26 here, if you will? I'm just trying to understand of the $3 billion, how much capital, at least under the line of sight that you have today, do you think that you can have in place by '26 versus at some point through the decade, if you will?

Julien, the guidance that we're giving is that by 2026, if you look at the forecast that we disseminated, take that capital number and add $3 billion. So we hope to have all of these investments in place by 2026. To answer your question on AMI, as I've said in my formal remarks, we expect a decision from both Connecticut and Massachusetts. Quite honestly, we're working on vendor agreements to be able to move forward with those investments. That's about $1 billion in total, and we're going to start on it immediately. Certainly, by 2026, those will be fully in place. And then on the $500 million of interconnections, a good portion of it, if not all of it, could be in place by 2026. It's really the other opportunities to accommodate electrification and upgrades to our infrastructure.

Got it. Excellent. So it sounds like at least on the parts that you've identified, you've got line of sight for '26. And the timeline for more fully introducing the balance here would be sort of coincident with the timeline for announcing the sale?

Or as part of our normal update in February.

Okay, all right. Yes, absolutely. Okay. Excellent. Well, thank you guys. I appreciate it.

Thank you for your time.

Thank you, Julien. Next question is from Ryan Levine from Citi. Good morning, Ryan.

Good morning. Can you provide any details at this point regarding the collaborative marketing effort between Eversource and Ørsted in the offshore wind sale process? What rights does Ørsted have in this process, and how does that influence their involvement in the preparation and related activities?

Well, first good morning to you. Ørsted is a phenomenal partner. They are very good friends and they arm in arm with us even right down to the level of detail around anything that we distribute. They also joined us on any calls with potential bidders. So we don't really have any restrictions; they don't have any veto power. Obviously, they're our friend. They're a great partner. We will continue to do business with them, whether it's on the interconnection front or helping them in any way. So you should understand that this is a very amicable, very friendly, and coordinated effort as we look at this piece of our business.

Okay. So you're saying no veto rights? Do they have any ability to offer a price afterwards, after the formal auction?

No, we're going to test the waters, so it feels a bit early. We know how much we have invested in the joint venture. Considering the market conditions, we believe we should proceed, and we expect there will be significantly more value given the current situation.

Keep in mind that we have a clear understanding of the value, particularly in light of what occurred in the New York Bight and other transactions. We have a rough idea of where this is headed. We are aware of the key players involved, and they are well acquainted with the value of our assets. Therefore, we feel very confident about this.

I appreciate the color. Thank you.

All right. Thanks, Ryan. I appreciate it. Well, we don't have anybody else in the queue. So we want to thank you all for joining us. If you have any follow-ups, let us know today. We look forward to seeing you at the conferences in August and September. Have a wonderful summer off.

Thank you.

Thank you, everyone.