Eversource Energy (NYSE:ES) Q4 2023 Earnings Call Transcript
Eversource Energy (NYSE:ES) Q4 2023 Earnings Call Transcript February 14, 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: Hello and welcome to the Eversource Energy Q4 and Full Year 2023 Earnings Call. My name is Elliot and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Bob Becker, Director for Investor Relations. The floor is yours. Please go ahead.
Robert Becker: Good morning and thank you for joining us. I am Bob Becker, Eversource Energy's Director for Investor Relations. During this call, we'll be referencing slides 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. 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 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 all for joining us on the call this morning and for your interest in Eversource. Let me begin with the pathway for a full exit of our offshore wind business on Slide 4. When we started down this path in 2016, we were very excited for the opportunity to bring much needed renewable energy to our region. The high supply prices in the Northeast are not good for anyone, particularly our customers. Until we can reduce the region's reliance on gas, by electric generation price volatility will continue to cause difficulties for our customers. State mandates for our offshore wind procurement provided a strong impetus for our engagement, along with the recognition that offshore wind is one of the few renewable resources that can be produced in quantity to reduce reliance on natural gas and dampen the volatility of our region's electric prices.
Unfortunately, our offshore wind investment experienced difficulties as early-stage projects. These difficulties were largely a result of the pandemic, supply chain disruptions, rising interest rates and uncertainty around available resources for installation vessels and fabrication of turbine foundations. We are not alone, as several other offshore wind developers have also experienced similar challenges. These challenges, coupled with the lack of pricing flexibility, inherent in contracts approved by state regulators, result in a projected investment returns substantially below our required thresholds. At the same time, our core business is well positioned to deliver solid operational and financial results, as we move forward in supporting the region's transition to a cleaner energy environment.
This led us to seek out a path to refocus our investment portfolio on our utility business, with its strong opportunities for growth. For this reason, I am pleased about our announcement that we have reached an agreement to sell our existing 50% interest in the South Fork and Revolution Wind projects, to Global Infrastructure Partners, our leading infrastructure investor that will generate approximately $1.1 billion of cash proceeds. With the pending sale to GIP, our announcement last month, regarding the conditional sale of Sunrise Wind to Orsted and the sale of the offshore wind lease area that closed last year, I'm pleased to say that we have the pathway in place to finalize a full exit from the offshore wind business. For the year, we have taken a noncash cumulative impairment charge of approximately $1.95 billion, after tax.
John will discuss the impairment in more detail. However, I will say that the impairment reflects assumptions that our Board views as appropriate, given the uncertainty around the ultimate outcome of the Sunrise Wind rebid process. As John will discuss, the terms of the agreement with GIP are assumed and reflected in the impairment charge in our long-term financing plan. By taking this impairment charge, we are accounting for our full exit from Offshore Wind. We are pleased to be in the final stage of this long journey and we feel confident that we are turning over the range of the wind business to capable and committed parties. We will remain involved in managing onshore construction for all 3 projects and through our tax equity investment in the South Fork.
I'll close my comments on offshore wind, with a brief update on the status of the project construction activity. As the first utility scale, offshore wind farm in commercial operation in the U.S., South Fork Wind has been supplying power to Long Island since late November 2023, when the first turbine was installed. We are now in the process of installing the 12th and final turbine. We expect all turbines to be producing power by March. We continue to advance on both onshore and offshore construction of Revolution Wind, after reaching a positive final investment decision in October of last year. Work on the site of the new onshore substation in Rhode Island, has been underway since late last year. Seabed preparation for the installation of wind turbine foundations is currently in process.
Lastly on Sunrise Wind, we continue to get closer to the BOEM record of decision, while we await the results of the latest submission into New York's RFP floor. We made this submission jointly with Orsted, on January 25. Next, let me discuss the water distribution announcement, we made last evening, shown on Slide 5. Our water business is a valuable, well-performing and well-managed company. Although the Water business is earnings accretive to Eversource, we see the potential seal of our water business, as an opportunity to reduce equity needs and improve our regulatory diversity. With its current $1.3 billion rate base and a national reputation for operational excellence, the water business has a strong potential to be of substantial value to another owner, as part of a larger Water business, our strategic infrastructure platform.
As a result, we plan to launch a process for evaluating market interest in a transaction for the water business, with the objective of delivering value to both customers and investors. If successful, the proceeds from the sale will provide a source of cash without going to the equity market, thereby enhancing our balance sheet. Moving forward, Eversource will focus on the delivery of clean, safe, reliable energy to our customers and preparing for the clean energy future that our states, our customers and our investors expect. Now I'll turn to our excellent financial and operating performance results on Slide 6. Starting with the financials; we delivered another strong year with reoccurring earnings of $4.34 per share in 2023, representing growth of nearly 6% over 2022.
Our Board has approved a dividend increase for the first quarter 2024 of $0.715 per share which amounts to $2.86 per share on an annualized basis; this reflects an increase of 6% over 2023's dividend level. Moving to operations; I am extremely proud of our team once again for delivering reliable electric, natural gas and water service to our 4.4 million customers. As you can see, our electric reliability ranks in the top decile among our peers. We're focused on providing reliable electric service to our customers, who on average have gone nearly 2 years without an outage. In 2023, Eversource again outperformed its target injury rate. Our teams are keeping a strong focus on safe work practices not just during major storm events, when conditions are tough but every day on every job.
On natural gas safety, once again, the team delivered another strong year, replacing 145 miles of natural gas pipeline and delivering on-time emergency response times of 98% within 45 minutes. A performance that well exceeds our regulatory requirements. I want to congratulate the Eversource team on these accomplishments. I am very proud of the skill and commitment of the entire team in the way that our employees are aligned in our shared vision of providing the highest level of safety, innovation, service quality and financial discipline for the benefit of our customers. Turning to Slide 7. At Eversource, we know our customers expect us to not only deliver energy today but also to be prepared for the future. To that end, we are actively engaging with our states to enable the Clean Energy future that our customers and our communities envision.
At the end of January, we submitted our Electric Sector Modernization Plan, or ESMP to the Massachusetts Department of Public Utilities. After extensive input from the Grid Modernization Advisory Council and stakeholders across the commonwealth. The ESMP is the road map for building out the electric infrastructure and technology platforms to enable a reliable transition to a Clean Energy future in alignment with the state's Clean Energy plan. The filing specifically addresses the coming 5 and 10 years with a vision toward an 85% reduction in greenhouse gas emissions by 2050. Eversource has taken a leadership role in this endeavor and is viewed as a trusted partner at the table in planning the Clean Energy future for Massachusetts. We expect that the Department of Public Utilities to issue a final decision on our plan in August of 2024, addressing approximately $600 million of proposed incremental investment, among other components.
In Connecticut, we are continuing to work on our comprehensive outreach plan with participation from across the company. We are leveraging our internal talent to educate Connecticut's stakeholders on the importance of infrastructure investment to our customers in the broader Connecticut economy, as well as the affordability programs that we offer to customers. This approach has proven to be productive, in terms of raising awareness on the value of utility investment. And on the point that Eversource is [indiscernible] that is ready, willing and able to help Connecticut meet its Clean Energy goals. Lastly, in New Hampshire. We are gearing up for a number of regulatory initiatives, including a potential PBR proposal, in evaluating ways to help the state advance Clean Energy projects, such as large-scale solar development.
We're excited about the role Eversource will continue to play, to enable a Clean Energy future that's affordable and equitable for all customers. We'll continue to engage with all stakeholders to move this massive complex effort forward. Turning to Slide 8. As you may know, Eversource is an industry and market leader in environmental, social and governance. We continue that focus in 2023. We expanded the charter of the Board's governance, environmental and social responsibility committee, to extend this oversight to include climate-related matters. The full Board receives regular reports on our climate-related goals, key industry updates and policy activity through the Eversource climate scorecard. We continue to make progress on reaching our carbon neutrality goal by 2030 and we submitted our application for a new science-based target in December.
I'm pleased to report that due to our continued leadership on ESG, last week, Eversource was named one of America's Most JUST Companies, as announced by JUST Capital and CNBC, for the fifth consecutive year. We have a very exciting future here at Eversource, focused on what we do best. I will now turn the call over to John Moreira.
John Moreira: Thank you, Joe. And good morning, everyone. This morning, I will cover our 2023 financial results, the offshore wind impairment, the 2023 regulatory update, an update of our 5-year investment forecast for our regulated businesses. And I'll wrap up with our 2024 recurring earnings guidance, long-term financing plan and 5-year earnings and dividend growth guidance. I'll start with 2023 results on Slide 10. Our GAAP results for the year were a loss of $1.26 per share, compared with GAAP earnings of $4.05 per share in 2022. In the fourth quarter, results were a loss of $3.68 per share, compared with GAAP earnings of $0.92 per share in the fourth quarter of 2022. Results for the full year 2023 include an after-tax impairment charge of $5.58 per share, related to our offshore wind investment and $0.02 per share after-tax charge related to our nonrecurring costs.
Results for 2022 include a $0.04 per share charge, primarily related to transition costs associated with a completed integration of EGMA. Excluding these charges and the offshore wind impairment, our non-GAAP recurring earnings were $4.34 per share in 2023 as compared to $4.09 per share in 2022. Breaking down our 2023 full year non-GAAP recurring earnings of $4.34 into segments. electric transmission earned $1.84 per share for 2023, as compared with earnings of $1.72 per share in 2022. Improved results were driven by continued investments in our transmission system and lower income tax expense. Our electric distribution earnings were $1.74 per share in 2023, as compared with earnings of $1.71 per share in 2022. A base distribution increase at NSTAR Electric was partially offset by higher interest expense, property taxes and depreciation.
Our natural gas distribution segment earned $0.64 per share in 2023, as compared to $0.67 per share in 2022. Increases in depreciation and interest expense, higher effective tax rate and the impact of certain reconciliation charges exceeded the revenues we received from capital trackers and base rate increases at NSTAR Gas and EGMA that became effective November 1, 2022. Our water distribution segment earned $0.09 per share in 2023, compared with $0.11 per share in 2022. Lower results were driven by higher depreciation, O&M expense and interest expense. The results reflect the impact of a very disappointing decision in Connecticut, from PURA for the Aquarion water rate case which is under appeal. Eversource parent and other companies' earnings were $0.03 per share in 2023, as compared with a loss of $0.12 per share in 2022.
The improved results reflect a lower effective tax rate and the gain on our planned liquidation of a renewable energy fund, partially offset by higher interest expense and a contribution to the Eversource Charitable Foundation. Let me now turn to offshore wind, starting with the highlights of our sale of South Fork and Revolution Wind to GIP. With South Fork Wind expected to be in service before the transaction closes, our construction contingency is primarily related to Revolution. The terms of the transaction include a capital cost sharing agreement. Under this agreement, capital expenditure overruns incurred for the 50% interest in the project, up to approximately $240 million will be shared equally between Eversource and GIP. Above this threshold, 50% of any project cost overruns would be borne by Eversource.
If the final project costs come in under the current construction forecast, Eversource will receive a payment for this difference. The terms and pricing of this agreement with GIP are assumed in the impairment charge and in our long-term financing plan. Let me review the offshore wind impairment, as shown on Slide 11. In 2023, we recorded impairment charges on our offshore wind investment of approximately $2.17 billion pretax or $1.95 billion after tax. As you can see on this slide, the impairment charge was driven by a lower-than-expected sales value of approximately $400 million for the 3 projects, after completing our strategic review in the second quarter of last year. As a result of adverse developments in the fourth quarter, including the further reduction in the expected sales prices driven by higher project costs and the October 2023 denial of the OREC pricing petition for Sunrise Wind, we realized an additional impairment charge in the fourth quarter of approximately $1.77 billion.
The Sunrise Wind project drove about $1.22 billion of the impairment charge. In large part due to the OREC repricing denial which led to a lower assumed revenues and ultimately, an evaluation of the potential abandonment cost of Sunrise, if it is unsuccessful in the New York RFP for solicitation. As a reminder, to participate in the process to submit a rebid in the solicitation NYSERDA required any existing projects to terminate their current OREC agreements. This potential loss of both a contract revenue stream and ultimate project viability and any related termination costs was factored into our impairment analysis. Therefore, we assume that if Sunrise is not successful, in the rebid. This would result in no sales proceeds and no value attributable to the ITC adder.
These items, coupled with estimated cancellation costs for the project, net of any salvage value, drove the additional impairment charge. Although we have factored this downside set of assumptions and probabilities into our impairment analysis, if Sunrise is ultimately successful in the RFP, Eversource would then sell its ownership interest in the project to Orsted, under the terms of our recently announced agreement. With the completion of that sale, our interest in Sunrise would be terminated. We would not be subject to any further construction contingencies or project cancellation costs. If we are successful selling Sunrise to Orsted, it would provide a full exit for the Offshore Wind business. Turning to Slide 12. I'll walk you through the carrying value of our offshore wind investment, as of December 31, 2023.
The carrying value that I will discuss reflects the impact of our fourth quarter impairment charge by project. As you can see, the value of both Sunrise and Revolution were impacted by the fourth quarter impairment. The value of South Fork was not impacted. The fourth quarter impairment charge assumes a set of scenarios regarding potential construction contingencies for Revolution Wind. The charge also assumes that Sunrise Wind would be abandoned. We are very disappointed by the financial impact recognized on these early-stage Offshore Wind projects. However, we are comfortable with the impairment charge assumptions. We have reflected these assumptions in our long-term financial plan which I'll cover in a minute. As we move forward and finalize the sale of these projects, including the result of the recent New York RFP 4, the ultimate carrying value of our offshore wind investment, could change accordingly.
On the regulatory front, we had another busy year. Our key 2023 regulatory items are highlighted on Slide 13. Starting with Massachusetts, we completed proceedings on our 2018 to 2021 storm cost recovery request, of approximately $136 million. I'm pleased to report that the Massachusetts DPU conducted a very thorough review and we received approval to recover 100% of our request. This approval highlights the importance of our storm response and acknowledges the tremendous effort from my Eversource colleagues and our contractors to restore customers as quickly and as safely as possible. Also in Massachusetts, we received approval of our first annual revenue adjustment under NSTAR Electric's PBR plan. This adjustment included an increase of a capital adjustment factor or CAPA [ph] as we call it.
Turning to New Hampshire. We received the final order of proven $47 million of storm cost recovery, for weather events occurring in 2020 and in 2021. Again, we were granted nearly 100% of our request. We expect to file a general rate review in New Hampshire later this year, to recover the cost of investments that we have made over the last 4 years to significantly improve reliability for customers in New Hampshire. In total, we are now recovering approximately $400 million in rates, over the next 5 years for storm costs in Massachusetts and New Hampshire. In Connecticut, at the end of December, we filed our request for a prudency review of approximately $635 million of storm costs, relating to weather events that occurred from 2018 through 2021.
The Connecticut filing contains more than 10,000 pages of support for costs incurred for these significant weather events. We look forward to working through the prudency review with PURA in 2024. Lastly, in our Aquarion's appeal of its March 2023 rate decision, oral arguments were held on January 11 and we expect the court decision over the coming months. Turning to our regulated utility capital plan. Slide 14 reflects our 5-year utility infrastructure investments, by segment updated through 2028. As a reminder, this plan reflects projects that we have a good line of sight on from a regulatory approval perspective. Over this 5-year period, we expect to invest approximately $23.1 billion in our regulated electric, natural gas and water businesses, to continue providing customers with safe and reliable service to meet ongoing load growth and to achieve progress on Clean Energy objectives.
Starting with transmission. Our plan includes nearly $6 billion of transmission infrastructure investments, over the next 5 years. These investments include replacement of aging infrastructure to harden the system and increase resiliency during extreme weather events. Innovative substation projects undertaken for reliability and electrification purposes and interconnection projects, adding Clean Energy resources to the grid. Our Transmission capital plan includes a launch, scale, innovative project to build a substation in Cambridge, Massachusetts, completely underground. We are working closely with the city on this project which includes nearly $1 billion of investments to interconnect 4 existing transmission lines. This project will increase capacity to enable electrification and improve the reliability of electric service for customers.
Turning to Electric Distribution. Our updated capital forecast now reflects nearly $10 billion of planned utility infrastructure investments, with a continued focus on system resiliency and our top-tier reliability for Electric Service. Our planned electric distribution investments include over $0.5 billion of our AMI program, in Massachusetts. The AMI program will allow customers to save money through heightened control over their own energy consumption and to experience higher service levels through faster outage restoration and other service functions. On the natural gas side, our 5-year plan reflects nearly $5.5 billion of investments and is centered around reliability and safety. The plan is highlighted by our bare steel and cast iron pipe replacement programs in Massachusetts and Connecticut.
Across our natural gas system, we'll continue to thoughtfully engage with our states to ensure our investments enable equitable transition to a Clean Energy future. Turning to the water segment. Our 5-year investments are forecasted to be over $1 billion, supporting investments in water treatment facilities and water main replacements to improve water quality. Rounding out our Eversource capital plan, our investments in technology and facilities that's forecasted at $1.1 billion. Moving to Slide 15. Our updated capital plan reflects a $1.6 billion increase in utility infrastructure investments from 2024, through 2027 versus the prior plan. This increase reflects greater visibility on the work needed to serve our customers over the next 4 years.
An important consideration in relation to our 5-year capital plan is what has not been included. On the right-hand side of the slide, we show some potential infrastructure investments not currently included in our forecast which would be additive to the plan. These opportunities total up to $2 billion in the forecast period with Connecticut AMI at the top of the list at nearly $700 million. The resulting impact from our updated capital plan, is shown on Slide 16. The customer-focused core business investments included in our capital plan would result in 7.7% growth in rate base from 2022 through 2028. Next, I will turn to our 2024 earnings guidance on Slide 17. We are projecting a non-GAAP recurring earnings per share range of $4.50 to $4.67 per share for 2024.
Positive drivers this year include transmission investments for system resiliency and increased electric demand, distribution base rate increases in Massachusetts and New Hampshire, continued focus on controlling O&M expense and a lower effective tax rate. In 2024, our planned distribution rate increases include the first rate base roll-in for EGMA which will adjust rates to recover 6 years of capital investments. This rate adjustment will take effect in November of this year. These positive drivers are expected to be partially offset by higher expenses related to increased capital investments and share dilution. Turning to our long-term financing plan. I'll start with our cash flow assumptions regarding offshore wind, as shown on Slide 18.
As I said earlier, our wind impairment reflects a set of assumptions that we have also embedded in our long-term financing plan. Let me walk you through what is assumed in our financing plan. First, we assume cash inflows from the announced sale of South Fork and Rev Wind of $1.1 billion. These proceeds include the value of the 10% ITC adder for Revolution Wind of approximately $170 million. Also assumed in our financing plan, is the realization of our tax equity investment in South Fork Wind which we expect will bring in around $500 million of cash over the next 24 months. The last item is related to our sale of Sunrise Wind to Orsted which is not assumed in our long-term financing plan. If Sunrise is successful in the New York RFP 4 that would be a positive to our plan.
I'll 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 19. These drivers include the Offshore Wind proceeds that I just discussed, planned rate increases at our utilities, recovery of storm cost deferrals, scheduled equity issuances and proceeds from a potential sale of our water business. In terms of the equity assumed in our plan over the next several years, we expect to issue up to $1.3 billion of equity through our existing ATM program. We will also continue to be opportunistic with our alternatives. As Joe mentioned, 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.
As you can appreciate, we cannot provide any additional details beyond what we've disclosed. We will keep you updated on any decisions from this evaluation and any changes in our financial guidance. Closing now on Slide 20, our robust 5-year capital plan and long-term financing plan drive our 5% to 7% EPS growth rate, through 2028. To be clear, the 5% to 7% is based off of our 2023 recurring EPS of $4.34. Before we get to your questions, I'll turn the call over to Joe for his closing remarks.
Joseph Nolan: Thank you, John. As I previously said, I'm very excited as I look ahead to the future of Eversource. This amazing team that delivers every day is on the brink of a critical energy transformation, that will benefit our customers, our communities and our environment. The need for utility infrastructure investment has never been greater. In fact, in a draft study released last year, ISO New England projected a need, for up to $15 billion of transmission investment, to meet the region's 2050 Clean Energy objectives. As we look ahead, we see a tremendous need for a collaborative approach to leverage our utility infrastructure development and superior operating skills in Massachusetts, New Hampshire and Connecticut. On that note, I want to thank you for your interest in Eversource and I look forward to seeing you soon. I'll now turn the call back over to Bob and we look forward to answering your questions.
Robert Becker: Thanks, Joe. I'll turn the call back to the operator to begin Q&A.
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