Eversource Energy (NYSE:ES) Q1 2024 Earnings Call Transcript

Eversource Energy (NYSE:ES) Q1 2024 Earnings Call Transcript May 2, 2024

Eversource Energy isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and thank you for attending the Eversource Energy Q1 2024 Earnings Call. My name is Alyssa and I’ll be your moderator. [Operator Instructions] I’d now like to pass the call hand over to our host Matthew Fallon, Eversource Energy’s Director for Investor Relations. Matt please go ahead.

Matthew Fallon: Good morning and thank you for joining us. I am Matthew Fallon, Eversource Energy’s Director for Investor Relations. During this call, we’ll be referencing slides that we posted yesterday on our website. As you can see on Slide 1, some of the statements made during this investor call may be forward looking. These 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. We undertake no obligation to update or revise any of these statements. Additional information about the various factors that may cause actual results to differ and our explanation of non-GAAP measures and how they reconcile to GAAP results is contained within our news release, the slides we posted last night and in our most recent 10-K.

Speaking today will be Joseph Nolan, our Chairman, President and Chief Executive Officer; and John Moreira, our Executive Vice President and CFO and Treasurer. Also joining us today is Jay Buth, our Vice President and Controller. Now, I will turn the call over to Joe.

Joseph Nolan: Thank you, Matt, and thank you all for joining us on the call this morning. Let me begin with an update on the sale of our offshore wind business. I am pleased to report that we are on track to close the sale of the three projects over the coming months. We are progressing well on the approvals necessary to close these transactions as shown on Slide 3. We have filed all regulatory approvals with the New York Public Service Commission and FERC for the sale of South Fork Wind and Revolution Wind to global infrastructure partners. And we recently executed the purchase and sale agreement for Sunrise Wind with Ørsted. For Sunrise Wind, we have also filed applications for regulatory approvals the New York Public Service Commission and FERC.

We anticipate these approvals will take about 90 days. On the construction front, I can’t tell you how excited and proud I was of my Eversource colleagues as I stood alongside New York Governor, Hochul, to flip the switch to energize South Fork Wind in March. We will certainly capitalize on lessons learned from South Fork, a first of its kind project here in the United States. The same construction processes will be used for the Revolution Wind Project, where onshore and offshore construction is underway. Now that our offshore wind risk is largely behind us, we are very excited about the future of Eversource, delivering safe and reliable electric, natural gas and water service to our 4.4 million customers. Turning to slide 4, Eversource is moving forward as a pure play regulated pipes and wires utility business, doing what we do best, delivering clean energy safely and reliably to our customers every day.

When we are doing what we do best, our customers are the direct beneficiaries. A good example of this came in early April, when a late winter storm caused significant damage across the Northeast. Through our investments in technology, including smart switches and other reliability innovations, we were able to restore 85,000 customers in New Hampshire within five minutes, greatly reducing the impact of the storm to many customers in that area. This amazing response received numerous accolades from customers and personal acknowledgment from Governor Sununu. We take tremendous pride in our emergency response organization, in our ability to standup our emergency response teams for timely restoration. Eversource teams from all three states responded to the storm damage in New Hampshire, minimizing customer outage time.

Our resiliency investments help to minimize customer outage impacts. Our preparation enables us to hit the ground running in front of potential severe weather events and our emergency response plan supports scalable and efficient restoration for those customers who are impacted. And we work tirelessly to communicate that timely recovery of storm cost is critical to support these efforts. Turning to the clean energy future, as you can see on Slide 5, the states we serve have very aggressive greenhouse gas reduction goals. Both the transportation sector and residential and commercial heating sectors are the largest contributors to greenhouse gas emissions. Although the region has acted by reducing carbon emissions from power generation, we have a long way to go on heating and transportation to achieve the state’s targets by 2050.

To meet these targets, we project that average household electric demand will double in the summer and more than triple in the winter. That’s why it’s critical that we all work collaboratively and get started today on making achievement of these targets a reality. Moving to Slide 6, achievement of Massachusetts decarbonization goals are being addressed, in part through the Electric Sector Modernization Plans, or ESMP. This is the most comprehensive clean energy plan in the nation, with planning processes and requirements that will provide the pathway for the state to achieve its clean energy objectives. The Eversource ESMP is a product of our system planning process, incorporating the state’s assumptions for projected demand growth from electric vehicles and electric heating.

To develop our ESMP, we have analyzed expected electric growth down to the circuit level to identify grid investments needed over the next five years and beyond. These infrastructure investments will convert our distribution grid into the platform for the clean energy transition, will increase electrification capacity by 180%, and will allow for the adoption of 2.5 million electric vehicles, 1 million heat pumps and 5.8 gigawatts of solar generation, thereby making Massachusetts a leader in delivering clean energy to its homes and businesses. In New Hampshire, we are focused on a number of regulatory initiatives and are evaluating ways to advance clean energy initiatives such as large-scale utility owned solar development. For example, New Hampshire state legislators are working on a bill that would institute structural reforms to New Hampshire’s Energy Facility Site Evaluation Committee, or the SEC.

Reducing the size of the SEC from 9 members to 5 and eliminating unnecessary process to improve efficiency and to lead to more consistent outcomes. In turn, this will lead to an accelerated siting and permitting process for these clean energy initiatives. Turning to Connecticut. State policy leaders have a vision of solar expansion, electric vehicle adoption and future renewable purchase power agreements as part of its clean energy transition. We are a strong supporter of these efforts to enable the clean energy future for our customers, and we certainly are looking to partner with the state collaboratively and productively to achieve this important vision for our customers. While we continue to work diligently to support state policy leaders on thoughtful and reasonable policies aimed at increased adoption of clean energy technologies and the reduction of carbon emissions.

We have serious concerns with the lack of alignment between state policy and regulatory decisions implementing that policy. As it stands, regulatory policies in Connecticut discourage investment and utility innovation as well as our participation in a wide range of clean energy initiatives that rely on our balance sheet and our capital resources. Upfront program funding by the utilities does not work where cost recovery is continually deferred and delayed into the future on uncertain terms. Without recognition that our funding sources rely on a secure and predictable cost recovery path, we cannot move forward to put additional capital resources on the table. We are encouraged by PURA’s decision last month to provide timely reimbursement of deferred public policy costs through the Company’s electric annual rate adjustment mechanism.

Decisions that adhere to law and legislative policy are critical to assure a constructive regulatory environment in Connecticut and to make the vision of a clean energy future a reality for our customers. Looking forward to the future, we remain committed to our extensive outreach plan across Connecticut, furthering our efforts to engage collaboratively and productively with Connecticut’s leadership. Lastly, I want to thank my Eversource colleagues for their unwavering commitment and dedication to our customers. I have the utmost confidence in our team to deliver safe and reliable energy service to our customers with daily progress toward a clean energy future. I will now turn the call over to John Moreira to walk through our financial results.

John Moreira: Thank you, Joe, and good morning, everyone. This morning, I will discuss our first quarter financial results, give you a regulatory update and cover drivers for our cash flow enhancement. I’ll start with the first quarter results on Slide 7. Our GAAP and recurring earnings for the quarter were $1.49 per share compared with GAAP and recurring earnings of $1.41 per share last year. Breaking down the first quarter earnings results of the $1.49 per share into segments, our electric transmission earned $0.50 per share compared with earnings of $0.45 per share in 2023. Improved results were driven by our continued investments in our transmission system to address capacity growth for customers and connect clean energy resources to the region.

Our electric distribution earnings were $0.48 per share compared with earnings of $0.47 per share in 2023. Higher revenues primarily due to a base distribution rate increase at NSTAR Electric were partially offset by higher operating expense, higher interest expense and increased property taxes and depreciation. Our natural gas natural gas distribution business earned $0.54 per share compared with $0.49 per share in 2023. Natural Gas Distribution earnings increased due to higher revenues from capital cost recovery mechanisms, a base rate increase at NSTAR Gas and lower operating expenses. Our water distribution segment contributed a penny per share compared with flat earnings in 20023. Eversource parent and other company earnings were a loss of $0.04 per share compared to breakeven results in 2023.

The lower results were due primarily to higher interest expense and the absence of a net benefit in the first quarter of last year from the liquidation of a renewable energy fund. Overall, our first quarter earnings were in line with our expectations and we are reiterating our 2024 EPS guidance of $4.50 to $4.67 per share, as well as our longer term 5% to 7% EPS growth rate. Turning to regulatory items on Slide 8, starting with Massachusetts. We filed our electric sector modernization plan with the Massachusetts Department of Public Utility in January and we expect to have a decision on our plan in the August timeframe. Our ESMP calls for an incremental $600 million of capital investments for interconnection of solar resources through 2028.

As a reminder, this $600 million is incremental to our $23.1 billion capital investment forecast we announced back in February. In New Hampshire, we are very busy on the regulatory front. In March, we submitted our documentation for a prudency review of $232 million of storm costs related to storm events from August 2022 through March of 2023. We anticipate that review will be completed later this year. In addition, we anticipate filing a rate review in New Hampshire this summer with temporary rate relief going into effect 90 days after the filing. Closing out the regulatory update is Connecticut, where we received the final decision on our annual rate adjustment mechanism two weeks ago for new rates to become effective July 1st this year. The major drivers of the $873 million increase are recoveries of purchase power contracts and protected hardship uncollectible accounts, both of which are costs required by law.

These under collected costs in Connecticut, which were approximately $400 million in 2023 contributed significantly to a reduction in our 2023 FFO to debt ratio. This rate impact will be significantly offset by lower energy supply costs that will also go into effect July 1st this year. We appreciate PURA’s decision to provide timely reimbursement to the company of these state policy costs as required by law, reducing the pressure on our balance sheet to finance these costs for a longer time period. Timely recovery of these costs reduces the total amount that customers will pay through avoidance of carrying charges on these balances. In March, we resubmitted our request for prudency review of approximately $635 million of Connecticut storm costs relating to weather events that occurred from 2018 through 2021.

The vast majority of these costs represent payments to outside line and treat crews to assist in the restoration resulting from 24 significant storm events during that period. We are currently in the discovery phase of the proceeding. As a reminder, recovery of these costs will coincide with new distribution rates following our next general distribution rate proceeding. In early April, following the Superior Court decision on our Aquarion rate case, we filed for a review of that decision by the Appellate court along with a request to transfer the appeal directly to the Connecticut Supreme Court. We are requesting that the Connecticut Supreme Court hear this case due to the critical legal issues raised by the Aquarion rate decision. Without proper resolution of these issues, there will be a negative impact on utility investment and customers long term.

As Joe mentioned, we are committed to our extensive and ongoing outreach efforts that have been pivotal to educating key leaders and communities on the necessity for stable regulatory policies. We are also demonstrating our commitment to support the state’s policy leaders who seek to move the state forward with thoughtful and reasonable policies aimed at reducing carbon emissions and achieving increased adoption of clean energy resources. A successful path to a clean energy future will require a substantial ramp up in planned proactive distribution infrastructure investment rather than piecemeal approach as well as sound public policies and adherence to legal principles to enable that investment. However, the existing gap between the state’s vision of a transition to a clean energy future and the regulatory framework discouraging investment is an obstacle for Connecticut’s progress on climate change, the clean energy transition and even core service goals.

As a result, we have taken a hard look at our capital deployment priorities and are implementing necessary cuts to our Connecticut investment levels in 2024 and over the next five years. In 2024, we are reducing our capital expenditures by nearly $100 million and we have notified PURA of our unwillingness to put capital at risk in relation to advanced meter infrastructure and electric vehicle programs. In total, we are expecting to reduce capital investment in Connecticut by $500 million over the next five years until we see Connecticut’s regulatory decisions come back into alignment with law and state policy, our decisions on the deployment of our valuable capital resources have to be based on our current experience with regulatory outcomes for utility investment.

With that, I do want to emphasize that we are confirming our five-year capital expenditure forecast of $23.1 billion across all business units. Substantial consistently emerging infrastructure needs across our system provide ample opportunity for capital deployment in lieu of using those valuable resources in Connecticut. I will now cover a number of drivers that are expected to enhance our FFO to debt ratio from 2023 to 2025. As you can see on Slide 9, the under collection of 2023 deferred state policy costs, which will now be recovered as a result of the 2024 annual rate adjustment decision in Connecticut as well as other under recoveries of regulatory deferrals across all states of approximately $200 million contributed to the lower FFO to debt that we experienced in 2023.

We expect other enhancements in 2024 and 2025 that include the sale of South Fork and Revolution Wind assets to GIP. Upon closing of the sale to GIP, we anticipate receiving approximately $1.1 billion of cash proceeds from this transaction. In addition to the GIP sale proceeds, we anticipate utilizing our tax equity investment in South Fork Wind, which we expect will bring around $500 million of cash over the next 24 months. Lastly, collection of storm costs in Massachusetts and New Hampshire, planned rate increases at our utilities, the sale of our Sunrise Wind Project to Ørsted, equity issuances and cash flows from a potential sale of our water business will drive the enhancement of 2023 FFO to debt to 14 to 15 targeted by 2025. Moving on to our equity issuances, in the first quarter of 2024, we raised approximately $75 million through our existing ATM program and we issued 550,000 treasury shares.

We continue to anticipate our equity needs to be up to $1.3 billion over the next several years. Also, as we announced in February, we are undertaking a review of our water distribution business. Proceeds from a successful sale are assumed in our long-term financing plan, reducing the level of equity that would otherwise be needed. We continue to prepare materials needed to launch the first phase of this process. Closing out on Slide 10, as I mentioned earlier, our $23.1 billion 5-year capital forecast and our forecasted financing plan drive our 5% to 7% EPS growth rate through 2028 based off of our 2023 recurring EPS of $4.34 per share. I’ll now turn the call back to Matt for Q&A.

Matthew Fallon: Thank you, John. Alyssa, we are now ready for questions.

Operator: Thank you. [Operator Instructions]. The first question will be coming from the line of Shahriar Pourreza with Guggenheim. Your line is now open.

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Q&A Session

Shahriar Pourreza: Hey, guys. Good morning. Joe, I guess, what just firstly, what CapEx are you guys actually cutting in Connecticut? Where are you kind of redeploying? And is that redeployment actually accretive just given the cost of capital differences? Thanks.

Joseph Nolan: Thank you, Shahriar. Over the past decade, we’ve spent a significant amount of money on electric reliability for our Connecticut customers. Our best-in-class engineering has moved months between interruptions from 10 months to nearly 2 years. So clearly our investments have paid huge dividends for our Connecticut customers. However, the regulatory decisions over the past few years are misaligned with the law and the state policy. And without a secure and predictable cost recovery path, we cannot continue to put additional capital resources on the table. So, our investment objectives in Connecticut have been centered around safety and reliability. As you’d expect, we will not reduce our safety spending. Therefore, the reduction will likely come from reliability areas. As John has mentioned, we have ample opportunities for capital deployment on our system. So, we feel very, very good about that. And yes, it would be accretive.

Shahriar Pourreza: Got it. And, Joe, can you cut more if need be?

Joseph Nolan: Well, we are going to be very thoughtful and deliberate about it. Obviously, we’ve had a great track record down there. I will tell you that the reliability numbers in that state are best in class. I don’t think you’ll find it really anywhere else around the country. So, I’m very proud of that. But if we continue to see this negative regulatory environment, we’re going to have to look at everything.

John Moreira: I would also add Shahriar that as a reminder, we do have a resiliency program in place, which we get timely recovery of up to $300 million of distribution investments at CL&P, which has been very, very critical for us to achieve this performance level that Joe just mentioned.

Shahriar Pourreza: Got it. And then maybe just a quick one for John. John, just the up to $1.3 billion of equity is obviously still in plan and obviously that level is going to be dictated by the water sale outcome. I guess how are you thinking about the means of issuances? Are you thinking more in systematic terms or kind of prefunding spending and the balance sheet ahead of time? So, ATMs versus maybe rip the bandage off block. Thanks.

John Moreira: Our view and that will continue to be our position is to be opportunistic in exploring utilizing our ATM program to accomplish that. As I have said time and time again, an ATM program gives us tremendous flexibility and we were very successful in executing at least through March $75 million we’ve done quite a bit more over the past couple of weeks.

Operator: The next question comes from the line of Carly Davenport with Goldman Sachs. Your line is now open.

Carly Davenport: Hey, good morning. Thanks for taking the questions. Thanks so much for taking the time. I wanted to just start on the FFO to Debt walk. Thanks for the details there. I guess, first, could you just remind us of the cadence of the 2023 under recoveries hitting the cash flow statement this year? And then how should we just think about — as we think about the other drivers that you’d identified sort of the split between the impacts between the $1.8 billion and those other drivers?

John Moreira: Sure. So, the under recovery as highlighted in Slide 9, Carly, for 2023 across all of the utilities with the biggest impact being CL&P in Connecticut was approximately $600 million. So, if you were to normalize where we landed at the end of 2023 from an FFO to debt at Moody’s was approximately 9%. So that would drive that up as we’ve indicated on the slide about 200 basis points. So, with the favorable order that we received a couple of weeks ago on the annual rate adjustment mechanism, we feel good that cash plus more related to 2024 costs will start to come in the door effective July 1st through April 30th of next year. So, a 10-month recovery, which is very helpful to us. And then the other items what we’ve tried to do is to highlight, where we as it relates to our offshore wind, what we have already identified and have disclosed to you all that would significantly move us up closer to the 14% to 15% range by the end of 2025.

But certainly, building up towards that range towards that time period.

Carly Davenport: Got it. Okay, great. And then maybe just on the Massachusetts CL&P process, what are sort of the next milestones for us to look out for there? And then just more broadly, how do you think about opportunities for the other states that you serve to adopt sort of similar frameworks?

John Moreira: Sure. So, I’ll start with Massachusetts. So, hearings on that docket just basically concluded. So now we get into the briefs and reply briefs. But one thing I want to point out to, based on the legislation that was passed a couple of years ago, the clean energy legislation, the DPU does have to render a decision by that August timeframe that I stated in my formal remarks. So, as we move forward, the $600 million that I highlighted in my formal remarks is really what will materialize if we do get a favorable approval from the DPU that will materialize within our forecast period. But there’s further investments that will be needed beyond our current forecast period that we’ve also have highlighted in our filing. So obviously, Massachusetts continues to be very proactive in identifying opportunities to really make sure that the goals that the state has established is realistically and proactively accomplished.

In Connecticut, as Joe mentioned, we would love to support their clean energy strategy. But as we have both indicated in our formal remarks, it will require a collaboration and cooperation by us, by the utilities in Connecticut as well as the authority. And then lastly, in New Hampshire, as we mentioned, we are having discussions with the state on utility owned solar. We’ll likely be proposing an investment opportunity in the months to come. As I mentioned in my formal remarks, we do plan to file for a rate review this summer. And all of that solar investment, just to keep in mind, would be regulated investment, solar investment, utility owned, very similar to the model that we have here in Massachusetts, Carly.

Carly Davenport: Awesome. Appreciate that color.

Operator: The next question comes from the line of Nicholas Campanella with Barclays. Your line is now open.

Nicholas Campanella: Hey, good morning, everyone. Thanks for the time. Good morning. Hey, so just kind of sticking with Connecticut here and just the fact that you’re cutting investment there, but you also had this rate order, this outcome on Aquarion. Just how do you kind of see that kind of affecting the process that you’re running there to potentially monetize the asset? And just maybe you can kind of update us on that process, your confidence level that, you know, whatever happens there, there wouldn’t be additional equity kind of coming into the plan that you outlined today?