Welcome to the Eversource Energy first quarter 2019 results conference call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Jeff Kotkin from Eversource Energy. You may begin.
Thank you, Paulette. Good morning, and thank you for joining us. I'm Jeff Kotkin, Eversource Energy's Vice President for Investor Relations. During this call, we'll be referencing slides that we posted last night on our website. As you can see on slide one, some of the statements made during this investor call may be forward-looking as defined within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and are subject to risk and uncertainty, which may cause the actual results to differ materially from forecasts and projections. These factors are set forth in the news release issued yesterday. 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 31st, 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. I will turn to slide two and turn over the call to Phil.
Thank you, Jeff. Today I'll cover our first quarter 2019 financial results, an update on key regulatory dockets, and recent developments concerning our offshore wind partnership with Ørsted. Starting with the quarter in slide two, we had a very strong start to the year, earning $0.97 per share compared with earnings of $0.85 in the first quarter of 2018. Earnings improved at each of our three largest business segments: electric transmission, electric distribution, and natural gas distribution. Transmission earnings were $0.37 per share in the first quarter of 2019 compared with $0.34 last year. The improvement is due to the increased level of investment in our transmission facilities. In the first quarter of 2019, core utility transmission capital expenditures totaled $199 million, and we continue to forecast core utility transmission investments of nearly $1 billion for the full year.
Our electric distribution segment earned $0.38 per share in the first quarter of 2019, compared to $0.33 last year. Most of that increase is attributable to the outcome of the recent Connecticut Light & Power rate case and lower O&M costs at NSTAR Electric. In addition to the base rate increase, CL&P was allowed to make increased levels of investment to make our system more resilient and to recover related costs through trackers. Those benefits were slightly offset by the absence of $4.3 million at PSNH, related to generation earnings in 2019. As you know, we divested these units in 2018. Our natural gas segment earned $0.24 per share in the first quarter of 2019, compared with earnings of $0.18 in the first quarter of 2018.
The increase was primarily related to the outcome of the Yankee Gas rate case settlement that we achieved last year and the implementation of revenue decoupling at Yankee Gas. It's important to note that under revenue decoupling, we recognized higher revenues during peak usage periods like the first quarter of 2019, and we will have lower monthly revenue targets in the lower use periods like the second and third quarters of the year. Aside from the implementation of revenue decoupling, our natural gas segment benefited from tracked investments related to our expanding program to replace cast iron and unprotected steel pipe. We continue to expect those investments to total approximately $160 million across both Massachusetts and Connecticut in 2019, and this is up from $117 million last year.
While segment results were consistent with last year and our expectations for 2019, our parent and other segment lost $7 million in the first quarter of 2019, compared to a loss of only $1.4 million in the first quarter of 2018. This was due primarily to higher interest expense, resulting from higher short-term rates and the refinancing of some long-term debt at higher interest rates. I should add that you may have noticed on our income statement that our effective tax rate for the quarter was 21% compared to the 23%-24% rate we had forecast for the year. The difference is related to how we accounted for the returning to customers of excess deferred income tax collections, and it is likely to remain at that level for years, assuming corporate tax rates are unchanged.
You should not expect that the lower effective tax rate will have any improvement on our net income. Moving on from earnings discussion to key operating performance results, our continued intense focus on safety continues to show strong results. Our record is among the best in the industry to date with our safety rate, commonly known as DART, is less than 0.7. Our electric reliability continues to trend very strong with months between interruptions at nearly 18 months. We are nearly perfect in our goal of responding to natural gas emergencies within target time frames. We are also doing better than our own targets in terms of diversity and our internal sustainability targets. Turning to recent regulatory activity, you probably recall that three of our largest distribution jurisdictions have recently implemented multi-year rate plans that provide us with significant visibility for those distribution businesses for many years into the future.
As you can see on slide three, last week, we filed a request to implement temporary rate increase at Public Service of New Hampshire. The base electric distribution rates would total $33 million effective July 1st. Later this month, we expect to file a request to increase permanent rates on July 1st, 2020, by an additional $37 million above the temporary rates. Public Service in New Hampshire last saw an increase in base rates approximately a decade ago, and since then, our operating costs have remained essentially flat over those 10 years, while our reliability has improved about 40% and is now in the upper tier among medium-sized electric utilities in the East. Improved service has been driven by more than $1 billion of investments over the past decade while keeping operating and maintenance expense flat since our last distribution adjustment.
It's truly been a great result for New Hampshire customers. From electricity, I'll move to water. On April 22nd, the town of Hingham, Massachusetts, voted to purchase the assets of Aquarion Water Company that serve the town of Hingham and the neighboring towns of Hull and North Cohasset. The purchase price is expected to be more than $100 million. The Hingham system represents the largest part of Aquarion Massachusetts assets, but only about 5% of Aquarion's total plants. About 90% of Aquarion's operations are in Connecticut. While we're disappointed with the outcome of the vote, we were aware that this effort by Hingham was underway when we successfully acquired Aquarion. We continue to see additional growth opportunities for the water business in the future. The town has indicated that it hopes to close the transaction before year-end. We'll continue to work with the town for an orderly transition.
As part of the process, we'll determine the final purchase price and the use of proceeds, but we're confident that the sale will not result in any loss for Aquarion. Turning to financing, CL&P issued $300 million of bonds maturing in 2048 at an all-in rate of 3.85%. Proceeds were used in large part to pay off a $250 million 5.5% coupon maturity in February. In terms of equity, I noted in our year-end call that we expect to issue approximately $100 million of treasury shares annually for the next five years through our dividend reinvestment, employee stock purchase, and 401 match plans. Through April, we've issued about 575,000 shares through those plans this year. Again, that's four months through April.
We also noted that on our call, we plan to issue an additional $2 billion of equity through 2023 to fund our nearly $13 billion core regulated business capital program and our existing offshore wind partnership with Ørsted. This new equity is incorporated in our expected 5%-7% EPS growth rate. As I said in February, we expect to be opportunistic about the equity issuance over the forecast period. Slide four provides you with an update on where we stand with our contracting for offshore wind in New England and New York. As you can see, Massachusetts is required by statute to issue a new RFP for 400-800 megawatts by mid-year. Department of Public Utilities is also evaluating whether to double that initial authorized 1,600-megawatt offshore wind procurement to a total of 3,200 megawatts.
In Connecticut, PURA last year approved a 200-megawatt contract with Revolution Wind, and we expect an additional 100-megawatt contract to be filed in the second quarter. Additionally, in Connecticut, the legislature is considering proposals to add another 1,000 to 2,000 megawatts of offshore wind RFPs. The session ends in Connecticut in early June. In Rhode Island, the PUC approval process is underway for a 400-megawatt contract between Revolution Wind and the local Rhode Island distribution company. We expect a decision on the contract in June. In New York, bids were submitted February 14th into a New York RFP for at least 800 megawatts of offshore wind, and we continue to await the results of that.
We continue to be very positive about offshore wind, the zero carbon, and the economic development benefits that all of these projects will bring to our region. We also expect the projects contracted thus far to provide a very significant source of earnings and cash flow growth as the offshore wind turbines enter service in late 2022 and 2023. When these units enter service, we expect our earnings growth rate of 5%-7% to move appreciably higher as a result. Now I'll turn the call back to Jeff for Q&A.
Thank you, Phil. I'm going to turn it back to Paulette just to remind you how to enter the queue for Q&A.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have an audio question, please press star then one on your touch tone phone.
Thank you, Paulette. Our first question this morning is from Michael Weinstein from Credit Suisse. Good morning, Mike.
Hey, good morning. Hey, on the water deals, are there any other municipalities that are in the same boat that are considering a purchase of their systems?
No, they're not. In fact, there was a special provision in the late 1800s when Hingham was first sold to the utility at that time, so there are no other similar provisions in other cities.
I'm sorry if I missed it, did you say what kind of ballpark proceeds you expect to get and what you intend to use those proceeds on?
Yeah, I did. The final price tag has to be determined to account for capital additions since certain time periods, but we expect it to be more than $100 million.
Is that something that could potentially reduce equity needs, or is that something you already contemplated in your plan?
Well, the vote just happened in April, so it's certainly something that we would factor into our ongoing needs in the future.
Right. It doesn't affect the $2.5 billion expectation of equity?
It's a small amount. It's $100 million. Certainly it's a positive benefit to our cash position.
Got you. Okay. Also, can you comment at all on how offshore wind proposals are coming along, especially in New York at this point? I think New York is supposed to be announced soon. Is that your expectation?
Yes, that is our expectation that the stated announcement should be soon. That's our expectation.
Is it going to be within a couple of weeks? Have they indicated at all when they'll come up with an announcement?
I think they're on a schedule that fits sort of their internal needs and requirements. I do think that the decision would be coming in the nearer term, but I don't have a specific date for you, Mike.
My last question is, what part of the equity plan that you have is specifically for offshore wind? I understand the majority of it is for the core capital plan, but how much of that $2.5 billion of equity is needed for offshore wind specifically?
Right. I think as we stated in our previous call when we announced it for the year-end call, that our capital plan, the $13 billion, the investment in the offshore wind is all part of our total investment plan, and we have not specifically allocated a certain amount of equity need to each of those specific areas. It's really a total need that Eversource has to execute on the plans going forward. I will just want to reiterate, too, that, as I said before, we expect to grow the earnings with this additional equity need already included in that. We expect to grow the earnings of the company long term 5%-7% and somewhere in the middle of that range. The specific allocation to each bucket, we have not determined.
Okay. All right, thanks a lot.
Thanks, Mike.
Thanks, Mike. Next question is from Insu Kim of Goldman Sachs. Good morning, Insu.
Good morning. Just one question on the potential regulated investments, not in the base plan, like the grid modernization in Connecticut and potential gas safety spend that may come out in Massachusetts. Any updated thoughts on timing and scale of those?
Good morning, Insu. There really isn't any definitive update in terms of timing. I will say that one of the areas that we talked about was grid mod spending in Connecticut, and just recently, a new PURA chair, Marissa Gillett, took her seat as the chair of that commission. We would expect sort of the procedure there on grid mod to start moving forward. I don't have a specific date for it, but that is a new point of information since our last call. Other than that, there really isn't a specific timeframe. We will file our updated plan for three-year plan in Massachusetts next year, and the New Hampshire proceeding is sort of underway, but no specific timeframe there. Other than the new PURA chair, which should move things along, we think in Connecticut, there really is no new dates.
Understood. That's all I had. Thank you.
All right.
Thanks, Insu. Next question is from Caroline Bone from Deutsche Bank. Good morning, Caroline.
Hey, good morning, guys. I was just curious, and apologies if I missed this, I was just a couple minutes late dialing in, but could you kind of quantify how much the implementation of decoupling in Connecticut added to the Q1 results? I guess you had $0.05 up from natural gas revenues, and I was just curious, how much of that was the decoupling implementation?
Yeah. You didn't miss it. I did indicate that the decoupling mechanism really provides, the way it's implemented, sort of more of an uplift in the periods where there's high usage and high demand, so that would be like the first quarter, and lower revenues in the second or third quarter where there are lower usage for gas in the system.
Got it.
I would estimate that that's probably $0.03-$0.04 in the first quarter.
Okay
That could've been considered in other quarters before the implementation.
Got it. That's very helpful. All right. The other thing, I was just kind of noticing that you guys have a lot of short-term debt outstanding, or at least you did at the end of Q1. How much of your capacity have you guys used up?
We generally try to keep our outstandings about half of what we have capability for. We do have a number of financings planned for the rest of the year. There are ebbs and flows, Caroline. We try not to be in the market all the time, but build up a certain critical mass, and see if there's a maturity that we can then do that along with terming out some short term. I would expect that from time to time, the levels move up, sometimes it's less. Usually, we're at about 50% of our capacity.
Okay. That balance might come down a little bit, but you kind of feel comfortable with where it is?
Yeah, I would expect it to come down.
Okay. All right. That's it for me. Thank you.
Thanks, Caroline.
Thanks, Caroline. Next question is from Shahriar Pourreza from Guggenheim. Good morning, Shar.
Hey, guys.
Hi.
Just real quick on Mike Weinstein's question on the equity. Obviously, you guys are going to be opportunistic, are you sort of more prone to layer in the equity as the wind spending starts to really ramp up in the 2020-2021 timeframe? Obviously, the allocation's going to be different, and you have your internal plans to finance some of your base business. As we're thinking about the ramp-up of the wind spending and the allocation of that equity.
I think our proposal is consistent with what we talked about last time, which is that we will be opportunistic over the five-year period. Things you would look at are what the cash needs are, what the market conditions are, et cetera. Not being specific as to what specific timeframe that'll happen over, those are some of the considerations we would use. The cash needs, the market conditions, and that type of thing.
Okay, got it. Phil, can you just repeat what you alluded or what you kind of highlighted around your growth rate as the wind spending starts to really kick in, and they go in service?
Yeah. What I said was that We have units that come online in 2022 and 2023, and we're very positive about the contribution that can make. When they enter service, we expect the earnings growth rate of five to seven, it to move up appreciably higher as a result.
Okay. Not within the band, but incremental to the five to seven.
That's what I said, yes.
Okay, great. Just lastly, maybe just a quick update around Northern Pass. Obviously, you've had some change in leadership, and Chris Sununu has been a big proponent of the project. Maybe just a quick update on sort of the status there.
The status of Northern Pass is it's in the court now in New Hampshire, at the New Hampshire Supreme Court. On May the 15th, there'll be oral arguments in the case. Ahead of that, obviously, parties have filed briefs in the matter. On May the 15th, there'll be oral arguments. The court then will take all the information and deliberate on that, and hopefully sometime later on this year, that decision will come out of the Supreme Court. Typically, when decisions come out of the court related to regulatory matters, they're not sort of an up or down decision. They really are more to identify if there are points that were made that should be remanded and reconsidered by the body that originally did that.
If we're successful at the court, we would expect that that were to happen, it would go back to the Site Evaluation Committee with some things to reconsider in the process.
Okay, great. That was it. Thanks, guys. Thanks, Phil.
All right. Thanks, Shar.
Thanks, Shar. Next question is from Travis Miller from Morningstar. Good morning, Travis.
Good morning. Thank you. I was wondering, when you talk about the higher earnings for the offshore wind in that 2022 and 2023 period, what is the CapEx trajectory look like to get there? Is it something that you'd have to start immediately, or is it something that phases in? Where does it peak? How do you get there on the CapEx side?
Just to be clear, in terms of the higher earnings contribution, it would be beyond the 2023 time period. We indicated that one of the contracts for South Fork comes online. We expect it by the end of 2022, and then the Revolution Wind turbines move in through the year in 2023. Really, in our current 5%-7% guidance, there's a small amount of contribution from wind. Really what I'm talking about here is that beyond 2023 is where you'd see the more appreciable contributions from the offshore wind. Having said that, in terms of construction, we really haven't given specific. We said that the permitting process is probably a few years. The construction process is a few years.
In the early years, you're in more of a permitting process, and spending is more sort of on those legal and other costs you would expect for permitting, and then construction sort of ramps up at the back end of the period.
Okay. Can you start booking earnings before it actually goes in service, or does the earnings accounting go with the cash flow?
No, you cannot. On the offshore wind, there's no earnings related to the capital spending. It would be when the revenues come in.
Okay, great. That's all I had. Thank you.
Thank you, Travis.
Thanks, Travis. Next question is from Andrew Weisel from Scotia Howard Weil. Good morning, Andrew.
Good morning, guys. First question is on Massachusetts offshore wind. The law requires that each RFP needs to procure prices no higher than those signed in response to past RFPs. I think most people would agree that the Vineyard Wind project was aggressive on pricing. My questions are: Do you expect the proposed legislation to remove that ceiling to move forward? Do you, as a bidder, think that lower costs from a more mature supply chain would overcome the loss of those tax credits, or is higher pricing inevitable?
Thank you for that question, Andrew. As you mentioned, in The Boston Globe and other news sources, there are reports that the legislature is considering taking another look at that provision and seeing what impact that it has on future bids. Does it inhibit the bidders? Is it better for the Commonwealth in the long run that there's some modification to that provision? That'll be worked out by the legislature coming up. There are certainly publicly disclosed discussions that that type of activity is going on. I will say that, depending on where you are in the bid process, and you could be losing a considerable amount of tax benefits. You may have done a bid with 24% investment tax credit in mind, and you get out a few years, you're maybe down to half of that, or it's sunset totally under the current law.
I think that that would be a significant impact on a bid price. Maybe whether or not that could be overcome by supply chain, I think you'd have to wait and see. Certainly, you'd have a known number of a reduction of a tax credit versus an unknown benefit from the supply chain. I think that in the long run, the loss of the tax benefit would be significant to the bidder.
Okay, thanks. That's helpful. Sorry, go ahead.
No, I was going to say, and certainly, we all have to keep in mind that if tax benefits exist or they get extended or something happens, that in the long run benefits customers because prices can reflect that and should result in lower prices.
Understood. My next question is on rate cases. You talked about the PSNH rate case filing and the multi-year plans. What is your latest thinking on when and where we might see the next filings pop up?
Well, I think that possibly the only real franchise that isn't under an agreement right now is at the gas business in Massachusetts. I would expect that as the next one up would be that, since it's the only one really that doesn't have a plan. As you know, and somebody mentioned earlier, I think Mike did earlier in the discussion, there's an evaluation going on in the Commonwealth of Massachusetts, taking a look at the gas distribution systems across the whole Commonwealth. I'd say that you'd want to wait and see what the outcome of that was. Maybe there's some additional programs that have to be implemented, and certainly you'd want to know that before you prepared a filing. If you're going to have to implement new procedures, you'd want to make sure you had revenue to recover that.
The next case I would expect to see, because it's the one that hasn't been through the process yet, is in the gas business in Massachusetts. In terms of the timing, I would expect that to be somewhat after we see what comes out of the review that's being conducted in Massachusetts.
One last one. This is probably a minor point, the slide on the Greater Boston and New Hampshire Solution looks like two of the projects have slipped in terms of the approval going from 1Q to 2Q. Project completion, it seems like a couple more will not be completed by the end of this year. Anything you can comment on what changed and how big of an impact that might have?
It won't have any impact in terms of the rate base. The capital investment plan may move for that, the overall transmission plant and service rate base will not be impacted by those changes. I will say that, like any project that we do these days, getting through some of the siting and permitting, as you know, probably takes a little bit longer than it did five years ago, and challenges and whatnot. There are a couple of towns that were associated with the Greater Boston and New Hampshire Solution that the permitting process was moving slower than we had hoped for. We expect to fully get through those processes, but just on a somewhat delayed basis, that will not have an impact on the transmission rate base.
Okay. Thank you very much.
You're welcome.
Thank you, Andrew. Next question is from Andy Levy from ExodusPoint. Good morning, Andy.
Oh, hey. I didn't realize it keyed in. How you guys doing?
Good. All right.
How are you?
I'm doing all right. A little off-the-number question. Just on Aquarion, I guess one of the strategies that you had was to possibly grow that through acquisitions. Obviously, with Connecticut Water still in play, we're not sure what's going to happen there. Longer term, if there's not the ability to grow through acquisitions, even of smaller systems, and obviously, you just lost a system now, does it make sense for Aquarion longer term, kind of stay within the Eversource family? Would it be something that you would possibly look at to sell, and maybe not raise as much equity?
We feel very confident about our ability to grow the water business, Andy. Not every transaction goes your way. There's been transactions that happen over time that we're not involved with, that other parties are involved with. You're not going to win every transaction or every RFP or every item that you have out there. We feel we are committed to the water business for the long term. We want to be a long-term operator of that. We see much strategic sense to that in terms of our vision to be a clean energy leader in the region. We're in the water business for the long term, and we feel confident that we'll be able to grow that business, if not, as you say, if not with the Connecticut Water transaction, that there'll be other opportunities in the future.
Okay. Thank you very much.
You're welcome.
All right. Great. Thank you, Andy. We have no other folks in the queue, so we want to thank you for joining us this morning for the call. If you have any follow-up questions, give us a call or we'll see you at the five conferences that start next week.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.