Eversource Energy : Q3 Eversource Financial Results, November 1 (Transcript

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EDITED TRANSCRIPT

Q3 2018 Eversource Energy Earnings Call

EVENT DATE/TIME: NOVEMBER 02, 2018 / 1:00PM GMT

CORPORATE PARTICIPANTS

Jeffrey R. KotkinEversource Energy - Executive OfficerPhilip J. LemboEversource Energy - Executive VP & CFO

CONFERENCE CALL PARTICIPANTS

Andrew WeiselScotia Howard WeilAngie StorozynskiMacquarie ResearchGreg GordonEvercore ISI

Julien Dumoulin-SmithBofA Merrill Lynch Energy Equity ResearchMichael LapidesGoldman Sachs Group Inc.

Michael WeinsteinCrédit Suisse AG

Paul PattersonGlenrock Associates LLCPraful MehtaCitigroup Inc

PRESENTATION

Operator

Welcome to the Eversource Energy Third Quarter 2018 Earnings Conference Call. My name is Hilda and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Mr. Jeffrey R. Kotkin, from Eversource Energy. Sir, you may begin.

Jeffrey R. KotkinEversource Energy - Executive Officer

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 last night 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 provision from the 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, 2017, and on Form 10-Q for the 3 months ended June 30, 2018.

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-K. Speaking today will be Phil Lembo, our Executive Vice President and CFO. Also joining us today are John Moreira, our Treasurer and Senior VP for Finance and Regulatory; and Jay Buth, our VP and Controller.

Now I will turn to Slide 2 and turn over the call to Phil.

Philip J. LemboEversource Energy - Executive VP & CFO

Thanks, Jeff. Good morning. This morning I'll summarize our third quarter results and recap some recent state and federal regulatory proceedings.

Overall, I'm very pleased with the results for the quarter and for the first 9 months of the year. They've been consistent with our expectations and we continue to target full year earnings per share between $3.20 and $3.30 per share as well as our 5% to 7% long-term earnings per share growth rate. We've also made very good progress on a number of important initiatives and continue to provide top-tier reliability and service to our customers.

Turning to Slide #2, we earned $0.91 per share in the third quarter of 2018 compared with earnings of $0.82 per share in the third quarter last year. As noted in the earnings release, the $0.91 includes 2 nonrecurring items. One involves the impairment of our investment in Access Northeast and the other involves some tax benefits. I'll provide more details on these impacts in a minute.

Turning to our core business results, our electric distribution segment earned $0.55 per share in the third quarter of '18, compared to $0.50 per share in third quarter last year. The primary driver behind the improvement was higher distribution margins. This resulted from new rate plans in effect in Connecticut and Massachusetts and higher sales at Public Service of New Hampshire, where we're not yetdecoupled. Additionally, you may recall from our second quarter results that the implementation of decoupling this year for NSTAR Electric in lieu of our former lost-base revenue mechanism resulted in higher year-over-year revenues in peak use quarters such as the third quarter and lower revenues in shoulder quarters such as the second quarter. Partially offsetting the higher margin was the absence of the New Hampshire generation earnings and higher depreciation, amortization and property tax expense, mostly at Connecticut Light & Power.

Our electric transmission segment earned $0.34 per share in the third quarter of '18, compared to $0.31 in the third quarter of '17.

Improved results were due primarily to an increased level of investment in transmission facilities this year. Our natural gas distribution segment lost $0.04 per share in the third quarter, compared to a loss of $0.02 per share in the third quarter of '17. The change was primarily due to higher operations and maintenance expense in the gas business.

Our water distribution segment, which is new this year as a result of our last December's acquisition of Aquarion Water, earned $0.06 per share in the third quarter of this year. More than half of Aquarion's earnings are typically realized in the third quarter when customer usage is at its highest.

Eversource parent and other earned $1 million in the third quarter of '18, or less than $0.01 a share, compared with earnings of $0.03 per share in the third quarter of '17. Parent and other results reflect 2 significant nonrecurring items. First, the Access Northeast impairment of $26 million after-tax or $0.08 per share represents all of our investment in the project. While we've made progress in most New England states in seeking natural gas capacity contracts with electric distribution companies, the Massachusetts Supreme Judicial Court ruled in the summer of 2016 that the state's electric utilities cannot sign such contracts without a change in law.

And at this time, despite projected regional energy savings of $1 billion per year, we do not see a clear path to achieving new legislation in Massachusetts, particularly, in light of recent unfortunate events outside of Eversource's service territory in the Merrimack Valley region of the state. As a result, we've concluded that our investment in Access Northeast is impaired.

Also, in the third quarter of 2018, we filed our final 2017 federal and state corporate income tax returns. There were several discrete items related to legislative tax code changes that reduced our tax obligations. Together, these reductions totaled $18 million, or $0.06 per share. Tax reform had no material impact on our 2017 results and we do not expect additional impacts going forward.

From financial results I'll turn to Slide 3 and recent regulatory developments. In September, we joined with the Connecticut Office of Consumer Counsel and the prosecutorial unit of PURA in filing a settlement on our Yankee Gas 3-year rate proposal. The settlement is now before regulators for review and we expect the final decision in the fourth quarter. The rate plan would be effective on November 15, 2018, and includes three moderate increases in distribution rates over a 3-year period through calendar 2021.

The authorized ROE will be at 9.3%, a slight increase from existing levels. We will also implement revenue decoupling and a capital tracker that will enable us to accelerate the replacement of older, cast iron and unprotected steel pipe. We consider the settlement to be a constructive outcome of the rate review in March, the second long-term rate settlement we've achieved in Connecticut just this year.

The CL&P review, as you may recall, was settled in January and new rates were effective in May. When you also consider NSTAR Electric's 5-year rate plan that was effective in February of this year, we find ourselves in a position of having long-term rate predictability in three of our largest distribution jurisdictions, with both decoupling and capital trackers for certain major investments. It means that for several years we'll be able to focus on just running the business to the benefit of our customers, rather than spending substantial time and resources on rate issues.

We've also had what I would consider positive news at FERC. In mid-October, FERC commissioners voted 3 to 0 to implement the new methodology for reviewing and setting electric transmission ROE cases. Rather than solely relying on the commission's discounted cash flow methodology, FERC is now proposing that going forward it would average the DCF, the CAPM, risk premium and expected earnings methodologies in determining new authorized ROEs. FERC's proposed ruling was a result of four serial complaints that were filed between 2011 and 2016 by complainants who asked FERC to lower the ROEs earned by the New England transmission owners. You may recall that while all four complaints moved through the hearing process and secured ALJ-recommended decisions, only the first one was voted on by FERC. That 2014 decision was appealed to the D.C. Circuit Court of Appeals, which vacated the decision and remanded thecase back to FERC in April of 2017.

FERC's new methodology addresses the issues raised by the appeals court in the first case but has not yet produced a new authorized ROE for New England. In its ruling, FERC asked the parties to the ROE complaints to file briefs and their own calculations for a new ROE for the region using the 4 methodologies for each of the 4 complaint periods. The briefing process will likely continue through early next year and it's not clear when FERC will actually decide on each of the 4 complaints, the oldest which dates back to October of 2011.

Until we receive final rulings and as instructed by FERC, we'll continue to bill customers based on the commission's 2014 decision on the first complaint, which calls for a base ROE of 10.57% and a cap on what any single project can earn of 11.74%. Now FERC has not ruled on any of the 4 complaints yet but the illustrative calculation that FERC describes in its order would result in a modestly lower base ROE of 10.41% and a higher cap of 13.08%. We're still a ways away from a final decision but such levels, if ultimately approved by FERC would not result in significant changes to our overall transmission ROE's. While we await FERC's actions, setting our actual ROE, we applaud the commission's intention to reduce the volatility of its ROE methodology.

Using the DCF methodology exclusively resulted in wide swings in potential results, depending on which companies were at the high-end or the low-end of the peer analysis and whether the subject company was widely or lightly covered by sell-side analysts. As you know, there were situations where a change in long-term growth rate estimates for a single company by just 1 analyst, could result in tens of millions of dollars in higher or lower earnings for New England transmission owners. Additionally, it appears that FERC is tightening the threshold to be applied to existing ROE's before it sets an ROE complaint for hearing. We anticipate the changes will provide more stability in transmission returns thereby encouraging more investment in a critical industry sector. This order follows the filing of a settlement in August regarding transparency of New England's transmission formula rates. The settlement provides increased transparency, simplicity and the opportunity for various stakeholders to review the annual rates. The settlement is now before the ALJ awaiting certification and after that it will go through the commission for a decision. It follows the lengthy and successful negotiation process between transmission owners and representatives of customers and state regulators, but it does not affect our ROEs.

Finally, I'll turn to our capital program in Slide 4. As you probably recall, during our August 1 earnings call, we updated our 2019 through 2021 capital program, adding about $600 million of spending in our core business. We continue to refine our estimates for those 3 years in anticipation of laying out our revised long-term capital investment plan during our February earnings call. And one that will also include estimates for the year 2022. While we are not yet ready to provide revisions to years '19, '20 and '21, I do expect that the February capital expenditures projection that we incorporate into our 10-K will be higher than the $7.1 billion estimate on this slide. More to come on that, early next year, as our plans get finalized. With that, I'll turn the call back over to Jeff for Q&A.

Jeffrey R. KotkinEversource Energy - Executive Officer

Thank you, Phil. And I'll turn the call back to Hilda just to remind you how to enter your questions.

QUESTIONS AND ANSWERS

Operator

(Operator Instructions)

Jeffrey R. KotkinEversource Energy - Executive Officer

Thank you very much. Our first question this morning is from Greg Gordon from Evercore.

Greg GordonEvercore ISI

I apologize I dialed in a little bit late because the Vistra call went a little long. They're a little bit higher beta than you so you have to listen to all the Q & A. Can you just orient us a little bit on where the earnings growth targets are now and where your $7.1 billion rate-base growth projection you think puts you inside that guidance range?

Philip J. LemboEversource Energy - Executive VP & CFO

Yes, Greg. Good morning. Thanks for taking this call -- this conference call. As I said before, our earnings growth target is driven by our core business. Our earnings growth is 5% to 7% and we feel comfortable that we'll be in the middle of that range going forward and really that is driven by the capital program that we have in place at the transmission business as well as the various operating companies. In addition, the strong emphasis that we have and focus on controlling our costs. So really 5% to 7% in the middle of that is where we've been guiding to.

Greg GordonEvercore ISI

So you feel like you're tracking to the middle of the guidance range today but you just indicated that you are confident that there's additional capital spending that could be added to that plan that would be beneficial to customers, we'll see that in February. Is that going to sort of potentially just extend the growth rate as you move out a year in sort of like -- in sort of from '19 to '21 to maybe '22, or could that potentially be additive to earnings potential during the current forecast period?

Philip J. LemboEversource Energy - Executive VP & CFO

Well, it could be both, Greg. As I said, in February we'll be adding a new year on. So certainly we'll have to extend or talk about the extension of that 5% to 7% into that time period. And depending on where we land in terms of the customer programs -- the beneficial nature of these capital programs for our customers -- depending on what that ultimately ends up being that could move you in the range. So I do feel good about where we are and where we are headed.

Greg GordonEvercore ISI

One last question and then I'll cede to the queue. Customers must be really suffering with high overall energy costs in the region, just especially during the winter months given the potential for ongoing scarcity events in terms of gas supply. How do you think about managing customer rate impacts? How tight do you expect the winter of 2019, '20 -- sorry, the winter of 2018, '19, to be and how might that impact reliability and how do you plan for that?

Philip J. LemboEversource Energy - Executive VP & CFO

Well certainly, fuel security, pricing, especially during the winter, are key considerations in New England and discussions have been ongoing for a while there, as you point out. And we do -- for our customers as you know, we are not in the generation business and we buy -- our customers who remain with us on last resort or basic service. We go out in the marketplace every 6 months to secure their energy needs. And we do see that in the winter that, that pricing of those contracts does spike as a result of constraints in the region. So we are trying to work through FERC. FERC has dockets open on fuel security there. The ISO New England is evaluating fuel security and certainly it's an issue that we've tried to be in front of in the region. In terms of reliability, our reliability is really top-tier and we continue to focus on that but certainly, if you take units out of the system -- like Pilgrim is planning to retire in 2019 -- that just puts more and more pressure on the constraints in the region.

Jeffrey R. KotkinEversource Energy - Executive Officer

Next question is from Mike Weinstein from Crédit Suisse.

Michael WeinsteinCrédit Suisse AG

I'm wondering if you could maybe bracket or talk a little bit about the annual capital spending that you anticipate from grid modernization in both Connecticut and Massachusetts going forward. I know that this is going to be a topic at EEI but I just wanted to see if maybe you could start talking about it now in terms of how you anticipate things increasing going forward?

Philip J. LemboEversource Energy - Executive VP & CFO

I guess it is different by state, as you point out, you're asking about that. In Massachusetts, we really have approval in our current rate plan and additional grid mod provisions for $233 million of spending. And really, we are well underway of implementing the core of that being our energy storage programs. We have 2 installations for that that are moving along well, as well as initiating our EV infrastructure build in addition, to other automation types of projects. So right now, that is the approved level in Massachusetts, $233 million. In the Massachusetts order, they set it up as -- just like we do more or less for our energy efficiency program, where it is going to be an ongoing 3-year cycle. So as we get another year into this program, we'll be filing a plan for the next 3 year cycle. So really at this stage, the only