Eversource Energy (NYSE:ES) Q3 2023 Earnings Call Transcript

Eversource Energy (NYSE:ES) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Hello, and welcome to the Eversource Energy Q3 2023 Earnings Call. My name is Alex, and I’ll be coordinating the call today. [Operator Instructions] I’ll now hand over to your host, Bob Becker, Director for Investor Relations. Please go ahead.

Robert Becker: Good morning, and thank you for joining us. I’m Bob Becker, Eversource Energy’s Director for Investor Relations. During this call, we’ll be referencing slides we posted on our website. And 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 this morning, and in our most recent 10-K and 10-Q.

Speaking today will be Joe Nolan, our Chairman, President, and Chief Executive Officer; and John Moreira; our Executive Vice President and CFO. 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, Bob, and thank you, everyone, for joining us on this call this morning. I look-forward to our conversation today, and to seeing many of you at the EEI Conference next week. First, let me start with the topic that I’m certain is top of mind to all of you, which is an update on the sale of our Offshore Wind investment. We are very pleased to have closed the sale of our 50% stake in the uncommitted lease area to Orsted in September, along with our South Fork Wind tax equity investment. We are delighted to have these transactions behind us. As for the seal of our interest, in the three projects which are under development, we have substantially completed our contract negotiations with a buyer and continued to make good progress on this front.

What remains to be completed is for the buyer and Orsted to finalize several documents, such as their new joint-venture agreement. We expect this process to wrap up shortly, allowing us to execute our sales agreement with the buyer and announce the terms of the sale. As you see on Slide number 3, I’m very happy to report that our South Fork Wind project is expected to fully go into service in early 2024. The onshore construction is complete and connected to our export cable. While offshore construction is significantly advanced with the offshore substation and array cables installed and connected. Currently, the turbine installation is underway and we expect to have seven to nine turbines operationally complete by the end of this year, with the remaining turbines installed in January.

This project will spearhead the US offshore wind industry and will be one of the country’s first utility-scale offshore wind farms built by Connecticut labor from various unions. On October 31st, our joint venture announced that we have taken our Final Investment Decision or FID on Revolution Wind. This is an important project milestone that allows it to advance to full onshore and offshore construction and installation and have this project in service in late 2025. I’d like to now address the recent events in New York, which I know have been a source of great interest for many of you. On October 12th, the New York Public Service Commission denied petitions for pricing adjustments from several renewable developers, including the petition for our Sunrise Wind Project.

The petition sought to address the extraordinary macroeconomic challenges from higher inflation and interest rates, along with supply chain disruptions that developed since our OREC agreement was executed in the fall of 2019. These factors were incorporated by the New York State Energy Research and Development Authority or NYSERDA in their recent offshore wind solicitation. While we are disappointed with the New York PSC’s decision, especially given that NYSERDA had publicly advocated for pricing adjustments, we support their commitment to transparent competitive RFP process. We are very encouraged to see that New York is working to establish an accelerated rebidding process, which includes an accelerated track, where winning bids could be announced as early as next year.

Together with our JV partner Orsted, we responded to NYSERDA’s request for information. Together, we will work towards developing a bid that will reflect the attractive nature of this project. We feel confident that Sunrise Wind will deliver clean and reliable energy to New York, and support economic development in the region, much earlier than many other projects. We will continue to evaluate ways to maximize project economics and to ensure project schedules remain on track. We have begun limited onshore construction for Sunrise Wind and we have also identified solutions for our installation vessel, which many of you have been asking us about to maintain the project schedule for Sunrise Wind and Revolution Wind. We expect both projects to be in service in late-2025.

We’re excited by the recent actions taken by the six regional governors who asked the Biden administration to clarify tax benefits for current US offshore wind projects and provide relief on federal offshore wind lease costs, as well as, encouraging accelerated permitting process for offshore wind projects. And in October, Connecticut Governor Ned Lamont announced a first-of-its-kind partnership between Connecticut, Massachusetts, and Rhode Island to seek offshore wind proposals that will expand the benefits for the region and help reduce costs. All three states have issued RFPs to procure over 6,000 megawatts with bids due in early 2024. Eversource will play a key role in providing the transmission and distribution infrastructure investment needed to connect these important resources to our grid.

Moving over to our core business, as you know, everything we do here at Eversource is done with a focus to continue to enhance our service for customers. As shown at the top of Slide 4, we continue to serve customers well, delivering top-decile electric reliability performance at nearly two years between interruption and our gas emergency response are exceeding our internal target. These high-performance levels are the result of the investment we’ve made in our electric and gas systems over the past several years. Investments focused on ensuring our system is strong and resilient and ready to adapt to the needs of our customers for years to come. Looking at our Clean Energy focus, we continue to move forward on enabling clean energy in our region, and we continue to make good progress in reaching our carbon neutrality goal by 2030.

In Massachusetts, we are investing nearly $2 billion in our electric transmission and distribution system to advance clean energy resources. Moving to the bottom of Slide 4, our customers continued to be burdened by high energy prices, particularly during peak winter months. While this winter’s supply prices will be high compared to summer rates, they are expected to be significantly lower than last winter’s; a welcome relief for our customers. To-date, Connecticut is fully procured at prices significantly lower than last year. Massachusetts is at 50%, New Hampshire is procured through January. If current market conditions continue, the expectation is that the winter supply rates in all three states will be much lower than last year. Though prices across the region are lower than last winter, we recognize that our customers are feeling the pinch of high cost in many areas, that’s why we’re doing what we can today to help our customers lower their bills this winter.

Along with our industry-leading energy efficiency programs, we also launched a new outreach campaign in Connecticut to encourage customers to sign up with competitive suppliers to save money. We’re also educating customers on new energy assistance options. I’m happy to report that Connecticut residential customers have responded. The share of residential customers receiving standard service from Eversource has dropped from over 90% last winter to 70% heading into this winter. To serve our customers and ensure they optimize their energy use, we continue to build out our industry-leading energy efficiency programs. In fact, Eversource ranks number one as the best energy efficiency provider in the country. As you can see on the left side of the slide, we invested over $600 million in these programs last year, avoiding lifetime greenhouse gas emissions of nearly 3 million metric tons.

We’ll continue to build on this great foundation moving forward. By enabling energy efficiency, encouraging customers to shop for supply, and educating customers on energy assistance options, we’re doing what we can to lower customer bills today. Longer-term, we are working with our states to provide the infrastructure investment necessary to access reliable renewable energy like offshore wind and solar generation. Turning to Slide 5. The shift to electric vehicles and zero carbon heating will add tremendous incremental electric demand to our grid. As you can see here, New England electric demand growth is expected to more than double by 2050, and winter peak demand is expected [Technical Difficulty] 2050. This is in stark contrast to a relatively flat electric demand we’ve seen over the past decade.

Along with the rest of the utilities across the country, we are aggressively planning for the clean-energy future here at Eversource. On September 1st, we filed our Electric Sector Modernization Plan or ESMP. This plan is a roadmap for our partnership with Massachusetts to enable the state’s clean energy climate plan. Plan details how we’ll continue to maintain safe and reliable service for our customers, as we transition to a decarbonized future. In addition to our base investments necessary to increase distribution system capacity, including the implementation of AMI and other technology platforms, Eversource has proposed additional investment that goes beyond the nearly $2 billion of clean energy investment, in Massachusetts through 2027.

This investment will go towards improving the resiliency of our system, integrating additional solar generation, and implementing new technology to enable additional distributed energy resources. Our proposed plan is expected to exceed Massachusetts’ 2040 goals and achieve 70% of the state’s 2050 greenhouse gas emission goals. By requiring electric distribution companies to submit in a fully transparent manner, the long-term grid modernization plans, Massachusetts is taking a leadership role in enabling decarbonization. They’re not just setting policies, but tying infrastructure, clean energy, and customer engagement together. We’re excited to engage with environmental justice and consumer and business advocates to establish the right framework for all Massachusetts customers to advance towards the clean energy future.

We look forward to engaging with all stakeholders as we work towards a final decision from the DPU way next year. Moving on to Connecticut, the regulatory environment remains challenging as evidenced by Aquarion and United Illuminating rate case decisions, which produce returns that are value-destructive for investment, but we are encouraged by the recent actions by Governor Lamont supporting offshore wind investment in the region. We see the governor’s support as a realization that investment at a reasonable return is necessary to provide the clean energy future that our region and country are moving toward. In closing, I couldn’t be prouder of the effort that the Eversource team puts in every day, providing for our customers’ needs. We have the experience and the expertise to guide our customers as we develop a bold bright energy future for New England and the Northeast.

Thank you again for your time. I will now turn the call over to John.

John Moreira: Thank you, Joe, and good morning, everyone. This morning, I will review our results for the third quarter of 2023, discuss the status of our offshore wind investments, and review our cash flow position. Let me start with Slide 6. Our GAAP and recurring earnings were both $0.97 per share in the third quarter of 2022 compared with GAAP and recurring earnings of $1 per share and $1.01 per share respectively for the third quarter of 2022. GAAP results for 2022 include transition and transaction costs related to Eversource Gas Company of Massachusetts of approximately $2.2 million. As a reminder, results for the third quarter of 2023 reflect a negative $0.08 per share impact for NSTAR Electric’s rate design change, as shown on slide 7, adjusting the earnings for the third quarter of 2023 by this amount would result in both GAAP and recurring earnings of $1.05 per share.

As I have previously mentioned, this rate design change does not impact full year results. Moving back to Slide 6 and looking at some additional details on the third quarter earnings by segment, starting with our Electric Transmission segment, which earned $0.46 per share in the third quarter of 2023 as compared with earnings of $0.44 per share in the third quarter of 2022. Improved results were driven by our continued investments in our transmission system. Our third quarter 2023 Electric Distribution earnings were $0.50 per share, compared with earnings of $0.65 per share in the third quarter of last year. The earnings decrease is due primarily to the timing of the rate design change at NSTAR Electric that I mentioned earlier, as well as higher storm-related costs, higher interest costs, depreciation, and property tax expense.

These factors were partially offset by higher distribution revenues at NSTAR Electric and from capital trackers that we have in place. Our Natural Gas Distribution segment lost $0.10 per share in the third quarter of 2023 as compared to a loss of $0.07 per share in the third quarter of 2022. The increased losses were due to higher regulatory and operating expenses, depreciation, and interest expense, and were partially offset by higher revenues from the base rate increases at NSTAR Gas and EGMA which took effect November 1 of 2022. Our Water Distribution segment earned $0.05 per share in the third quarter of 2023, which is the same level, we are in the third quarter of last year. Eversource Parent and Other Companies’ recurring earnings were $0.06 per share in the third quarter of 2023, as compared to a loss of $0.06 per share in the third quarter of 2022.

The improved third quarter results primarily reflect a lower effective tax rate, that was partially offset by higher interest expense. Turning to Slide 8. Based on our financial results to-date and our strong cost discipline, we are narrowing our 2023 recurring earnings projection to between $4.30 to $4.43 per share compared with our previous range of $4.25 to $4.43 per share. Looking at our longer term earnings growth rate expectation, as you saw in our news release and can see on Slide 8, we are reaffirming our long-term EPS growth rate solidly in the upper half of the 5% to 7% range. We are also reaffirming our $21.5 billion five-year regulated capital program, as shown on Slide 9. Current capital expenditures totaled approximately $3.2 billion in the first nine months of 2023.

Now, to further expand on what Joe covered, we reached an important milestone in our effort to exit our offshore wind business. On September 7th, Eversource completed the sale of its 50% interest in the lease area that includes approximately 175,000 developable acres to Orsted for $625 million in an all-cash deal. We also closed on our tax equity investment in South Fork Wind with Orsted. We used $528 million of the proceeds from the lease area sale for our tax equity investment. As a current 50% equity partner in South Fork, half of this tax equity investment or $264 million was returned to us in October. We expect to recover the tax equity investment primarily in the form of tax credits once the turbines are placed in service. These tax credits will be utilized to reduce Eversource’s federal income tax liability, including refunds from prior years expected over the next 12 to 18 months.

As Joe mentioned, we continue to make good progress on advancing the sale of our existing 50% interest in our three offshore wind projects. On our second quarter earnings call, I discussed one of our contingent considerations with the sale of the projects, that we expected a positive outcome from the Sunrise Wind OREC repricing petition, representing approximately $450 million in value to Eversource. Although we were very disappointed by the New York Public Service Commission’s rejection of the pricing petition, we are encouraged by NYSERDA’s quick reaction in its request to run an accelerated RFP process. As I previously indicated, advancing the sales transaction was not contingent on a resolution of Sunrise’s OREC repricing petition. As we assess our options for an OREC rebid for Sunrise, we could potentially see a scenario whereby we move forward with the sale for South Fork and Revolution Wind, followed by a transaction for the sale of Sunrise with the buyer.

As we navigate through this accelerated RFP process, we will continue to look at every alternative to keep this sales process moving forward in an efficient and timely manner. Now, I’d like to update you on our expectations for qualification for the two additional 10% investment tax credit adders under the Inflation Reduction Act or IRA. We had previously assumed a positive outcome regarding one additional 10% adder for Sunrise Wind and Revolution Wind that represented approximately $400 million in value to Eversource. Let me start with the Energy Communities. We do believe there is a good path around the prospects for qualifying for the Energy Communities provision of the IRA for both Sunrise and Revolution, which would increase our potential ITCs to 40% of the eligible basis for these projects.

Therefore, the Energy Communities’ qualification would cover this contingent value that we have recognized. Also, we will continue to explore opportunities to engage with the Treasury Department, as they clarify the rules around the domestic content provisions of the IRA to qualify for an additional 10% investment tax credit. As a reminder, the $400 million in value I just mentioned, is based on achieving a single quantification outcome between either the Energy Communities or the domestic content adders. As assumed in our second quarter offshore wind impairment charge, we only assume one additional 10% ITC adder as a contingent consideration. Should the projects qualify for both the energy communities and the domestic content adders, it would result in upside to Eversource.

We will continue to monitor both the RFP process and the ability to qualify for one or more of the ITC adders and evaluate their impacts along with other potential impacts, as part of our continual review of our impairment models. As a part of this evaluation, an important consideration will be the likelihood of success of any future bid award for Sunrise Wind from this accelerated RFP. Turning to cash flows. First, let me say that maintaining strong credit ratings is very important to us. Therefore, we are disappointed with the recent credit rating action taken by Moody’s as the timing was a bit unfortunate. Our short-term ratings were not impacted by this action and therefore we should not see any impact on our commercial paper cost. As it relates to future long-term financing cost, we see potentially minimal impact.

We expect our cash flows will be enhanced and more specifically, an improvement in our ratio of funds from operation relative to debt or FFO to debt. Although we expect that our 2023 FFO to debt would be a bit weak primarily given the delay in closing the offshore wind sales transaction, however, moving forward, we expect our cash-flow position to increase significantly. There are several factors we expect to contribute to enhancing our FFO to debt ratio well beyond the new threshold of 13% of FFO to debt by 2024 and beyond. A key factor driving an improvement in cash flows are the proceeds from the sale of our offshore wind projects along with eliminating the project funding requirements. You may recall that as of June 30th of 2023, the carrying value of our offshore wind investment was $2.1 billion, net of the $401 million pre-tax impairment charge and the proceeds from the sale of the lease area.

We have previously indicated that there are approximately $850 million of contingent considerations as part of the sale that is comprised of the $450 million pricing adjustments or now an RFP rebid for Sunrise OREC. If successful with the RFP award, this cash flow would be received when the transaction closes. In addition, as I previously discussed, a potential $400 million from the energy communities of a 10% ITC adder quantification would be received when the projects reach COD, which we expect in 2025. Cash flows will be further enhanced from our core regulated businesses from electric and gas distribution rate adjustments primarily in Massachusetts and other cost recovery mechanisms. We anticipate additional deferred storm cost recovery of about $400 million to $500 million rolling into rates during 2024, that will be recovered over a five-year period.

Also of note, we will fully monetize our $528 million of South Fork tax equity investment through lower tax payments and refunds, which will further contribute to an improvement in our cash flow and provide the ability to pay down debt, including a portion of the $1.4 billion of parent debt maturing in 2024. Lastly, we are committed to completing the $1 billion equity as part of our ATM program. As shown on Slide 10, we have issued no additional equity under this program through October. We also anticipate raising an additional equity through our dividend reinvestment and employee incentive programs through October, and we have issued 900,000 shares under that program. Thank you for joining us this morning, and I look forward to seeing many of you next week.

I will now turn the call back over to Bob for Q&A.

Robert Becker: Thanks, John. I’ll turn the call back to the operator to begin Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question for today comes from Shar Pourreza of Guggenheim Partners. Your line is now open, please go ahead.

Shahriar Pourreza: Hey, guys. Good morning. Can you hear me?

Joseph Nolan: Good morning, Shar.

Shahriar Pourreza: Good morning. Sorry, we just saw, obviously, your partner Orsted taking a total impairment of around $900 million for the three projects. Can you just talk a little more about why you didn’t take an additional impairment this quarter? And maybe just provide more clarity regarding Sunrise and that accelerated RFP process in New York with the buyer? I guess, John, what alternatives were you referencing? Thanks.

Joseph Nolan: Great. Well, thanks, Shar. Let me start with the RFP. While the merits of our repricing petition were in line with the recent NYSERDA RFPs and the resulting price ask from our petition was lower than the average price of a recent New York awards, our repricing petition was denied, unfortunately by the New York PSC. The primary reason, Shar, they cited was the pricing adjustments would have been done administratively rather than through competitive procurement, which is what they did not want to do. However, you’ll see that NYSERDA then issued an RFP right after the denial for a future RFP for additional offshore wind. We have responded to that recent New York RFI and we’ll evaluate the RFP terms. Given the maturity of Sunrise, in terms of the citing, permitting and early construction, this project is probably best positioned to win this RFP. John, you can hit on the impairment question for Shar, please.

John Moreira: Sure. Good morning, Shar. So it’s pretty — if you look at the impairment charge that our partner took last week and what happened to us in Q2, the impairment charge that we took, the pre-tax $401 million, which was reflective of the gain on the lease area, it’s pretty comparable. So I would portray it this way that I think there is alignment between what has happened to us on these projects and what is — and what we saw just last week with Orsted. So for that reason, and also the assumptions are very comparable with what they assumed and announced and what we considered back in June. And the last part of that question as to from a structural standpoint, you heard in my formal remarks that it’s still very, very early in the process, but there could be a scenario where we move forward with the buyer on South Fork and Rev and kind of have a second transaction with this buyer to wrap up Sunrise.

Obviously, it should be no surprise to anyone on the call from a project financing standpoint, you need to be locked in on the revenue agreement. So if there’s an ability for us to enhance the revenue agreement and that takes four or five months, we are very supportive of that project delay in closing.

Shahriar Pourreza: Got it. And then, John, you mentioned that the sale process could be split with Sunrise later, which is kind of helpful, I guess. What could that look like? How should we think about the implications for investing in the project and timing? Basically, will you be on the hook for it? And any contingencies? Thanks, guys.

John Moreira: Sure, sure. Yes, we’ll continue to have a funding requirement, but the negotiations that we already have with the buyer, we would be reimbursed for that extra funding at the time that we close. And, Shar, I think it’s important to realize that based on what we have heard come out of NYSERDA, this is a very expedited RFP process. There’s actually two. And so we could actually see a decision in advance of us closing the transaction on South Fork and Revolution. So I don’t want to lose sight of that. But in case there’s a further delay by NYSERDA in clarifying the win — the bidders of those RFP processes, there is a scenario where we would still move forward on the path that we have in front of us for those two projects followed by Sunrise.

Shahriar Pourreza: Got it. Perfect. I appreciate, guys. I’ll jump back in the queue. I know there’s others that want to ask. Thanks.

John Moreira: Thank you.

Operator: Thank you. Our next question comes from Steve Fleishman of Wolfe Research. Your line is now open, please go ahead.

Steve Fleishman: Yeah. Hey, good morning.

Joseph Nolan: Good morning, Steve.

Steve Fleishman: So just — hey, good morning, Joe, John. So the — I guess on the comment on the Moody’s action, the timing unfortunate. Can you just maybe give a little more color on kind of like your thoughts on that comment? And just from a corporate standpoint, ignoring the rating agencies, how should we think about the FFO-to-debt, you’re overall expecting and targeting going forward?

John Moreira: Sure, sure. As I said in my formal remarks, we pride ourselves in having very strong credit ratings, and that’s important to us. And my remark on the unfortunality of it is that the fact that we do see a significant enhancement in 2024 that would get us well above the 13%, and quite honestly, probably exceeding the 15% threshold. But we fully understand the predicament that Moody’s they’ve been in with a negative outlook for quite some time. Storm activity, as I’ve mentioned, in the past three years, have been — have created a headwind for us from a cash flow perspective, but we do see that enhancing in the years to come.

Steve Fleishman: Okay. And then the — you mentioned that you maybe could have gotten to the 15% in 2024, just like what — do you have a sense, John, of kind of what you’re targeting going forward now for the FFO to debt as you’re — as we’re thinking about your overall financing plan?