Good morning, and welcome to the Eversource Energy 4th Quarter and Year End 2018 Results. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note this conference is being recorded.
And I will now turn it over to Jeffrey Kotkin. You may begin, sir.
Thank you, Brandon. 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
forward looking as defined within the meaning
of the Safe Harbor provisions, 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 ks for the year ended December 31, 20 17 and on Form 10 Q for the 3 months ended September 30, 2018. Additionally, our explanation of how and why we use certain non GAAP measures is contained within our news release and the slides we posted last night and in our most recent 10 ks. As you can see on Slide 2, speaking today will be Jim Judge, our Chairman, President and CEO and Phil Lemo, our Executive Vice President and CFO. Also joining us today are Leo Olivier, our Executive Vice President for Enterprise Energy Strategy and Business Development John Norrera, our Treasurer and Senior VP for Finance and Regulatory and Jay Booth, our VP and Controller. Now I will turn to slide 4 and turn over the call to Jim.
Thank you, Jeff, and thank you everyone for joining us this morning. I'm happy, very pleased to discuss our successful undertake their work every day to improve the experiences of our customers, support our approximately 500 communities and execute delivering significant value to our shareholders and doing so in delivering significant value to our shareholders and doing so in a way that effectively manages the risks of our business. A regulated business cannot be successful without positive relationships with its regulators. We firmly believe that our success in achieving top tier reliability and safety performance, when combined with our success in reducing our O and M costs by more than 20% since 2012, enables us to create constructive regulatory frameworks that are fair to both customers and investors. As you can see on Slide 4, we settled 2 major distribution rate cases rate cases in Connecticut in 2018, one for our electric business and one for our natural gas business.
The Connecticut Light and Power Settlement was the first electric rate case settlement in Connecticut since 1986 and underscores the level of trust and transparency that we've developed with other parties. Less than 7 months after the 3 year CL and P settlement went into effect, we implemented a separate 3 year rate settlement for Yankee Gas. Both CL and P and Yankee Gas settlements provide us with forward looking rate mechanisms that allow us to step up our investments in our infrastructure to better serve our customers without suffering the earnings consequences of rate lag. In 2018, we also moved ahead on sustainability and greenhouse gas reduction. In addition to the divestiture of our fossil units, we successfully completed the build out of 62 megawatts of solar in Massachusetts.
The solar investment totals approximately $170,000,000 In addition, we also began implementing separate initiatives in Massachusetts to invest a total of 2 dollars in battery storage, electric vehicle infrastructure and other grid modernization projects. They all support Massachusetts state energy policy and by the middle of next year we do compile a new plan for the next 3 year cycle beginning with 2020 one. Our progress in these areas is being recognized. Various ESG rating firms socially responsible funds that have invested in our company. We also have achieved strong returns for our shareholders while our shareholders while managing our risk profile.
Across the board, our credit ratings remain very strong among the highest in the industry. Turning to Slide 5, you can that our total return continues to outperform both the utility index and the broad market on a short term and long term basis. While past performance is certainly no guarantee of future returns, it can be a good indicator. And past performance does validate our contention that a company that excels in its service to customers can also excel in delivering value to shareholders. Turning to Slide 6, you can see that dividend growth remains a central feature of our total return profile.
On February 6, our Board of Trustees approved a $0.12 annualized increase in our common dividend. The 6% increase is consistent with the midpoint of our 5% to 7% long term growth rate and exceeds the average dividend growth in our industry. And as you can see on Slide 7, we continue to forecast growth of 5% to 7% long term, a continuation of what we have delivered since our merger closed in 2012. The forecast that Phil will discuss with you shortly extends 5 years or through the year 2023. That's a 2 year extension to our prior guidance that only went through 2021.
As you expect, we continue to plan even longer term for our growth. As you can see on Slide 8, we made an announcement earlier this month that we believe will have a very positive impact on our results well through the next decade. On February 8, we announced the purchase of a 50% share
of some of
the projects in offshore wind energy leases that acquired when it bought Deepwater Wind late last year. Our latest transaction builds upon the partnership we first developed with in 2016, when we acquired a 50% interest in Bay State Wind. This month's announcement relates to leases for more than 250 square miles of ocean off the Massachusetts coast that are adjacent to the 300 square Bay State lease that we jointly own. These lease areas are among the best sites for offshore wind in the entire United States and they're in a prime location to meet the growing appetite for offshore wind in New England and New York. Together, the May State Wind and Deepwater Wind sites could host at least 4,000 megawatts.
And we shared a partnership fifty-fifty with largest, most successful and most experienced developer of offshore wind. Deepwater portfolio in which we now have a 50% share includes contracts for about 8 30 megawatts of offshore wind that will be sold to utilities in Connecticut, Rhode Island and New York. The 8 30 megawatts represent the largest concentration of offshore wind contracts currently awarded in North America. These projects still must go through the siting process and will have very limited impact on our earnings growth through 2023. But beginning in 2024, we expect our investment to be a significant source of earnings for Eversource.
And those 8 30 megawatts are likely just the beginning. Last week, we bid into a New York Offshore RFP that is expected to be awarded this spring. And later this year, we expect to bid into the 2nd Massachusetts Offshore Wind RFP when the state seeks another 400 to 800 megawatts of clean generation. All told, New England and New York have announced targets or adopted legislation that could result in the development of up to 15,000 megawatts of offshore wind by the year 2,035. Phil will have more to say about the expected financial impact of this announcement.
However, I want to underscore how pleased we are with this transaction, how pleased we are with our partner and the opportunity to bring a significant source of locally produced clean energy to our region. The major factor in our decision to expand our relationship with is our partner's unequaled global experience and track record of delivering offshore wind projects on time and on budget. Has more than a 25% worldwide market share, much larger than its nearest competitor. Of the 7 projects recently completed, 6 with the limit below the budget that was set when a final investment decision was made. This factor combined with record of completing projects on schedule has allowed the company to consistently deliver on its return expectations.
Also shares our philosophy about being a disciplined bidder who will not sacrifice returns to win business. So while we don't expect to win every offshore wind RFP, we fully expect that our successful bids will achieve a level of profitability commensurate with the project risk. We are the company and the largest developer of energy infrastructure in our region. Collectively, New England has very ambitious greenhouse gas reduction targets seeking to reduce emissions by 80% by the year 2,050. New York has established aggressive renewable targets as well.
Offshore wind will be central to meeting this region's carbon reduction and renewable development goals. And through this executing the region's energy policies. We're also pleased with the long term earnings growth opportunities these investments will provide to our shareholders. Now I'll turn the call over to Phil.
Thank you, Jim. And today, my part of the call will cover the 2018 results, an update on our key regulatory dockets, look at 2019 guidance, our new 5 year financial forecast and a discussion of our financing plans during that forecast period. As Jim said, we had strong 2018 from both an earnings and operational perspective. Beginning with Slide 10, we earned $3.25 per share for the full year compared with $3.11 in 2017. A year ago, we had projected earnings of between $3.20 per share $3.30 So we're right in line with that projection.
Our electric distribution segment earned $1.44 per share in 2018 compared with earnings of 1 point $5.7 in 2017. The decrease was primarily due to low generation earnings as a result of the divestiture of our New Hampshire generating unit assets. Also offsetting the higher revenues were increases in depreciation, interest and property tax expense. Our electric transmission segment earned 1 $0.34 per share in 2018 compared with $1.23 in 20 17. Improved results primarily reflect our increased investment in that business.
Our natural gas distribution business earned $0.29 per share in 20 18 compared with $0.23 in 2017. The increase was primarily due to higher revenues at our Yankee Gas our Yankee Gas Connecticut property, which were not decoupled until late in the year, as well as the outcome of our Yankee Gas rate review 2018 and we acquired Aquarion in December, so no 2017 results to report there. Eversource parent and other earned $0.08 per share in 2018, including 2 non recurring items that we discussed in the 3rd quarter, the $0.08 per share write off of our investment in Access Northeast and a $0.06 gain from various tax reform items. I know that a number of analysts may or may not have adjusted their estimates accordingly for these events. 4th quarter 2018 earnings totaled 0.7 $3 per share compared with $0.75 in the Q4 of 2017.
Transmission earnings were down a us about $0.03 per share. Electric distribution was off by $0.09 per share in the Q4, due in part to the absence of the generation earnings due to the divestiture as well as higher depreciation interest in storm damage restoration costs. Conversely, our natural gas distribution segment earnings were up by $0.06 per share in the quarter, benefiting from capital tracker mechanisms, colder weather and some increased revenues stemming from the Yankee gas rate decision. We also had a $0.01 per share in the Q4 of 2018 from our water business. Slide 11 summarizes the constructive resolution of our 3 distribution rate reviews in 2018, for Connecticut Light and Power, Yankee Gas and Aquarion in Massachusetts.
We expect far less state rate activity in 20 19, though for the first time in nearly a decade, we expect to file a general rate review in New Hampshire. Public service in New Hampshire is under earning on its allowed ROE of 9.67 percent despite significant cost management success across that business since 2012. In New Hampshire, rate reviews take about a year to complete, but utilities have the opportunity to request interim rate increases subject to refunds if they expect to under earn their previously authorized ROEs, while the rate review is pending. As a result, we are planning to file interim rate relief in New Hampshire in April and full rate review in May of this year. The next area to cover is FERC.
This past fall, I'm sure you know FERC issued a proposed a new methodology for determining whether it should initiate new proceedings concerning transmission ROEs. And if so, what methodology should be used to decide on that? As you can see on Slide 12, there are still 4 complaints pending against the England Electric Transmission Owners, of which we have a life. Initial briefs on the FERC methodology were filed in January with applied briefs due in a couple of weeks. We're hopeful that in 2019 this long running dispute will be resolved by FERC and that FERC endorses a standard that in the future will make this type of serial complaints we've had in New England highly unlikely.
From 2018 now, I'd like to turn to Slide 13 and discuss our 2019 guidance. We expect to earn between $3.40 $3.50 per share in 2019. As you can see in the slide, we expect to benefit from our multi year rate review outcomes in 2018 from our Massachusetts electric jurisdictions and our Connecticut electric and natural gas utilities. MStar Electric implemented roughly a of its 5 year performance based rate plan approved by the Massachusetts DPU in November of 2017. This increase will help fund reliability enhancement and customer service initiatives.
FCL and P based distribution rates will rise by an incremental $31,100,000 on May 1, 2019. Here again, this increase provides us timely recovery for our system improvements. Yankee Gas implemented a $1,400,000 rate increase on November 15, 2018. The increase was the first of 3 approved in a multi year agreement with Connecticut's PURA with the 2nd increase effective beginning in 2020. Yankee Gas also received approval for a tracking mechanism for cast iron and unprotected steel pipe replacements.
Finally, Aquarion in Massachusetts implemented a $2,000,000 rate increase just before the end of last year. In the transmission business, we expect to benefit from our continued investment in our FERC regulated facilities. We invested just shy of $1,000,000,000 in the transmission facilities at CL and P, AnStar Electric and Public Service in New Hampshire in the year 2018. And transmission investments in 2019 are expected to be at a similar level at $990,000,000 as we complete some of our major transmission projects in Connecticut, New Hampshire and continue to address our overhead and underground maintenance activities. In terms of O and M, although overall O and M is expected to increase in 2019 as areas of spending where we have regulatory commitments and recoveries in place, The O and M that affects earnings is expected to decline by about 1% to 2% in 2019.
Growth will also be as a result of distribution capital tracking mechanisms in the areas such as replacement of older cast iron and unprotected steel pipes in our natural gas business and older water mains at Aquarion. Somewhat offsetting the additional revenues associated with these investments are higher depreciation, interest expense and property taxes. So turning from the recent investments to future capital expenditures, I'll move on to Slide 14. Overall, we expect to invest nearly $13,000,000,000 in our core electric natural gas and water delivery systems from 2019 through 2023. We expect to invest nearly 8 $1,000,000,000 over the next 3 years.
So 8 out of the 13 over the next 3 years. This represents a significant increase from the $6,500,000,000 forecast we provided to you last year from our core business for those same years. It's a key contributor to continuing our outstanding service reliability to our customers and to the extension of our 5% to 7% growth rate through 2023. As you can see on Slide 15, every segment of the business is forecasting on Slide 16, we expect these increases to move our regulated rate base from 16 $600,000,000 at the end of 2017 to $24,500,000,000 by the end of 2023. That's a 6.7 percent compound annual growth rate that is expected to maintain our safe, secure and reliable delivery systems and drive our 5% to 7% EPS growth over that period.
This is the basis of why we believe we can grow earnings around the midpoint of our range on average over the next 5 years, confident in that ability. On the transmission side, the increased investment aligns with our asset management oversight process and anticipates completion of our larger projects in Greater Boston, our New Hampshire Seacoast and our Greater Hartford suite of projects. It also includes significant regional projects such as substation investments in Greenwich, Connecticut and in Cambridge, Massachusetts as well as a number of smaller projects to improve the resilience and security of the transmission system. These include replacing overhead structures and upgrading some of our underground infrastructure due to age and asset condition. Turning to Slide 17, you see that many of the larger projects we've spoken about to you over recent years are moving ahead to its final completion.
The Greater Hartford Central Connecticut Reliability Family of Projects should be complete by the end of this year. We received a written order on January 31st this year from the New Hampshire Site Evaluation Committee approving the Seacoast reliability project and that is expected to be complete by the end of this year. The Greater Boston Reliability Project continues to progress. This is a joint solution with National Grid. We're also we're responsible for 28 of these projects of which 25 should be complete by the end of this year.
In the electric distribution segment, we forecast capital expenditures of nearly $3,500,000,000 from 21 compared with last February's forecast of $2,900,000,000 for the same year. We also expect to invest another $2,250,000,000 over the course of the years 2022 2023 in electric distribution. There are a number of factors driving the increase as we discussed previously by we've identified many additional automation and storm hardening opportunities following the rash of nor'easters and tornadoes that struck our overhead electric system last March May. We also are seeing faster customer growth in certain areas of Greater Boston, including the Seacort area and cities of Somerville and Cambridge. We'll be making incremental substation investments.
These investments are being made to meet the growing demand of customers in these areas. In the natural gas business, we now $2,330,000,000 of capital expenditures over the next 5 years with about $1,400,000,000 occurring in the next 3. These expenditures include an acceleration of pipe replacement in both Connecticut and Massachusetts. In the recent Yankee Gas rate case, the Connecticut PURA shortened the period for replacing the older cast iron and unprotected natural gas distribution pipes from 13 years to 11 years. Our new forecast also reflects a more rapid replacement of cast iron unprotected steel pipe in our larger Massachusetts system.
We're also making additional plant Hoskington LNG facility that we're doing in parallel with our current liquefier and major systems upgrade. On Slide 18, you can see our forecasted pipe replacement capital budget for the next 5 years. You may recall that as a result of the Yankee Gas rate settlement, we now have fully reconciling pipe replacement and tracking mechanisms in place in both states. In addition to pipe replacement, we continue to see some growth from new construction, new customers, additional fuel cell application and the installation of new combined heat and power systems in customer facilities fueled by natural gas. This growth requires additional investments in our natural gas infrastructure, which drives the distribution rate base growth by an average annual average of more than 12% through 2023, far faster than any of our other regulated segments.
Rate base is expected to exceed $3,500,000,000 here by the end of 2023. Turning to 19 in our Water segment, we invested about $102,000,000 in Aquarian Systems in 2018, about 50% more than Aquarian's prior owners were investing each year. We expect to invest nearly 625,000,000 dollars in Aquarian Systems over the next 5 years or about 125,000,000 projecting rate base reaching approximately $1,200,000,000 by the end of 2023. Turning to slide 20, you can see about a third of that investment is designed to improve Aquarion's ability to meet the water supply needs of Southwestern Fairfield County in Connecticut. We now have reconciling mechanisms to recover pipe replacement investments in each state Aquarion serves.
In addition to growing Aquarion investments in our existing service territory, we continue to seek out opportunities to acquire small systems, particularly in Connecticut. About 3 weeks ago, state regulators approved Aquarion's purchase of assets of 2 smaller water companies in Southeast Connecticut. 4 of the small acquisitions are now before regulators for approval. I've mentioned a number of items that are included in our 5 year nearly $13,000,000,000 capital forecast. On Slide 21, we list some potentially significant items that are not in our core business CapEx forecast and may come to fruition during the forecast period.
In the CapEx forecast, we've been conservative, I'd say, in terms of what may come out of the grid modernization dockets in the states we serve. In Connecticut, we await the release of a Connecticut PURA report on a year long review of distribution companies long range also discussion of energy storage, increased real time monitoring of lines and substation conditions and other topics. Because the review has extended longer than had anticipated, we opted not to include any AMI or basic incremental grid modernization spending at CL and P in this forecast. We also did not include any basic grid mod in New Hampshire in this forecast, but expect to make some proposals in New Hampshire's upcoming general rate review or in a separate filing following the New Hampshire PUC's issuance of a final decision in their ongoing grid modernization proceedings. In Massachusetts, you can see on Slide 22, we are currently implementing 233 Beyond these programs, the DPU has asked the utility, the state electric utilities to propose next year a new 3 year grid modernization program for the period of 2021 through 2023.
Our forecast we expect Massachusetts to also consider the rollout of advanced metering infrastructure or AMI, but we've not reflected any rollout of AMI in this forecast. Separately, we've not included any investments in Northern Pass in this forecast. In terms of O and M, we expect O and M to remain relatively flat during years 2 through 5 of our 5 year forecast after the decline of 1% to 2% for 2019 that I mentioned earlier. Turning to our financing plans, as illustrated at the end of the appendix, we have modest level of maturities that will need to be refinanced this year and next year. However, we do have a significant core business capital program that I described earlier.
In addition, we have approximately $100,000,000 of excess deferred income taxes that will be refunded to customers over the next few decades. And the cash flow benefits of bonus depreciation as everybody knows has ended. These factors are positive for customers and positive for long term growth. Over the past 4 years, we've invested nearly $10,000,000,000 in our infrastructure to maintain great performance for our customers. Annual capital expenditures grew from about $1,900,000,000 in 2015 to more than 2.8 $1,000,000,000 in 2018, which contributed to our top quartile reliability and service response for customers.
We also entered the water business by acquiring New England's largest investor owned water company back in December of 2017. We continue to evolve our business to meet the growing needs of our customers as well as the clean energy mandates of our region. In order to finance this growth, this 5 year forecast period does include issuance of both new debt and equity to finance investments in a balanced way as you can see on Slide 23. We expect to issue approximately $2,000,000,000 of new equity over the next 5 years. This equity will help fund the nearly $13,000,000,000 of core business and capital investments we expect to make through 2023 and also our 50% of the capital requirements associated with the construction of the offshore wind facilities for which we and have secured PPAs that Jim talked about earlier.
We'll also use treasury shares to satisfy our dividend reinvestment program needs. Our expectation to grow earnings per share around the midpoint of the 5% to 7% range through 2023 anticipates the issuance of this equity over the 5 years. I'll repeat that. We expect to grow earnings per share around the middle of our 5% to 7% growth rate through 2023 even while issuing approximately $2,000,000,000 of equity through new common share issuance and with the Eversource shares coming out of treasury for our dividend reinvestment program. We'll be opportunistic about the equity issuance and we'll them accordingly over the next several years.
The PPAs we have for offshore wind do not produce revenues or earnings until the turbines begin producing energy. Construction costs including interest on debt will be capitalized into the cost of the projects, but there will be no earnings on equity investment until the turbines are operating. By 2024, we expect all 8 30 megawatts of offshore wind to be fully operational, being additive to our earnings growth trajectory in a meaningful way going forward. Cash flow is also expected to rise significantly once the offshore wind turbines are fully operational. On the fixed income side, we continue to carry very strong credit ratings for agencies.
We've always maintained a balanced approach here, achieving above average strong earnings and dividend growth and also strong credit ratings. We prided ourselves on delivering strong financial performance and strong financial condition. This plan accomplishes both in way, delivering 5% to 7% EPS growth and maintaining the strong financial condition and metrics that we currently have. To summarize on Slide 24, as Jim said earlier, 2018 was a very strong year for us. Our reliability and safety metrics remained in the upper tier of the industry.
Our customer service metrics continue to improve and we are introducing innovative technology to improve the customer experience in many ways, including more mobile access. We continue to play a vital role in implementing our state's clean energy initiatives. We continue to provide our investors with strong earnings and dividend growth and have provide an attractive future growth opportunity. Going forward, our core business continues to be the engine for our 5 percent to 7% EPS growth outlook through 2023. Our underlying rate base growth is 6 point 7% and we continue with our strong focus on our O and M costs.
And we see offshore wind is being additive to our earnings growth in a meaningful way beyond 2023. Look forward to seeing many of you at the Equity and Fixed Income Conference is coming up in Boston and New York over the next weeks. And I'll turn the call back to Jeff for Q and A.
Thank you, Phil. And I'm going to
pardon
Thank you, Brandon. First question this morning is from Mike Weinstein from Credit Suisse. Suisse. Good morning,
Mike. Good morning, guys.
Good morning.
Thanks for the big update. A question on the equity coming out. Can you give us I mean, I know
that you said it's going
to be opportunistic, but can you give us a sense of whether some of it is back end loaded for the wind project? I think you said that you wouldn't be investing in the wind projects until they come online, right? So that would be pretty far out. And I mean, that was I think the deal was only 2 $5,000,000 So that wouldn't be that much of the $2,000,000,000 equity to account for that. Maybe you can give us a sense of what that equity is for?
Like why do you need equity now? I mean, I understand that with bonus depreciation rolling off, you're a cash taxpayer at some point in this plan. So that would be a contributor. Can you just tell us like what's driving the $2,000,000,000 of equity and when you'll need most of it? Is it back end loaded or front end
loaded? Sure. So Mike, let me just add to something that you mentioned or clarify a few things. The capital program of $13,000,000,000 and the construction the 8.30 megawatts is included over the next 5 years, not just the that initial payment that you referenced to for the partnership in So it's the construction of the 8 30 megawatts worth of turbines and our CapEx program. So as I said, we'll be opportunistic and assess what our needs are over that time period.
No rush to need to do anything, but we'll take our time to look at what our construction program looks like over that time period and make some determination over the course of that period. So I wouldn't say that any of it is front end or back end loaded. I'd just say we'd be opportunistic of how we're going to approach it going forward.
Is how much of it is driven by the fact that you are becoming a cash taxpayer again? Because I mean just a few years ago we were talking about the possibility of stock buybacks, right? So this is the flip of that. I'm just wondering what's the driver of the 2,000,000,000
dollars Yes. We've been a tax cash payer. Actually, we're a tax cash payer this year, and we expect to be a tax cash payer payer next year. We had about $160,000,000 of cash taxes in 2018 and we'll probably be in the to 150 range in 2019 in terms of cash payment. And just to clarify, in terms of we had not really discussed share buyback.
I know that we got the question a lot, but I've always and we've always said that our focus is on investing in the infrastructure of the business and we didn't see that we would be in that mode of buying shares back, that we would be continuing to invest in the business. And as I said, we've had a significant capital program over many years and have a the next 5 years is even larger as I described going forward. Mike, this is Jim.
Just to add to a point that Phil made earlier in his comments. I think it's important to recognize that we're guiding towards 6% but we're funding the build out of the offshore wind as well with virtually no earnings contribution from that business until 2024 when Revolution Hunt comes online. So we're basically guiding to 6% even with the drag associated with the
offshore wind investment. Got you. And that offshore wind investment is just the for now, just the 50 percent investment for now, right?
That is our partnership with 50% on big state wind.
Okay, great. Thank you.
Thanks, Mike. Next question is from Insoo Kim from Goldman. Good morning, Insoo.
Good morning. Maybe to ask the timing of the equity in a different way. Phil, I think you have mentioned in the past that you wanted to keep the current Moody's credit rating intact. Do you have any sense of does that imply target FFO to debt of, let's say, 14% to 15%? And if so, what time period do you look to, I guess achieve or at least maintain that level?
Well, certainly, we like where our Moody's credit rating is and you're right that we would target to maintain that credit rating. And you're also right that that would indicate FFO to debt at those levels, which so that would imply we would be targeting that to maintain those ratings. So there's really no change there. And I think that as we get our kind of our spring forecast period with the rating agencies, we obviously have discussed any press release that comes out and we'll provide an updated forecast as we go forward.
Understood. And then regarding the 5% to 7% EPS CAGR through this time period, do you expect it to be a little bit lumpy given a lot of the regulator the bulk of the increase of the regulated investments are in the next 3 years and then you have a lot of the wind construction financing without the earnings benefits coming in the latter half of that period. I'm just trying to gauge whether there it's more stable or whether we could expect some lumpiness?
I'd say it's more stable. Yes. I mean certainly any particular quarter could have particular things in it, but I say you should expect us to be in a stable growth environment.
Understood. And just one more if I could. What's the total potential opportunity set for AMI at least over this 5 year period that could add to the rate base growth?
Well, in our when you look at it, I'll say for us nothing has been approved, right?
So if
you did a full rollout in Connecticut and Massachusetts, you might be at $1,000,000,000 for full rollout everywhere for AMI. To proceed with a program like that, it would be over multiple years to get that installed. So that's the sizing that you should be thinking about there.
Got it. Thank you very much.
Great. Thanks, Insoo. Next question is from Julien Dumoulin Smith from Bank of America. Good morning, Julien. [SPEAKER JULIEN DUMOULIN SMITH:]
Hey, good morning, team. Thank you. Perhaps just to kick off on the offshore side if I can. Can you elaborate a little bit on how you think about the size of the equity check now? I mean, I know you've put down something of a down payment here with the $225,000,000 I know that you're targeting regulated like returns on this investment, but what is the equity check that you're going to need just to kind of backdoor, if you will, into the 2024 ish earnings profile that we're talking about here?
Yes. Julian, this is Jim. I don't know, you mentioned regulated has identified high single digit IRRs as an appropriate return target. And importantly it's a limit on that. So that translates more to mid teens ROE for us.
We would expect the offshore wind to be our highest earning business segment.
Sorry, but okay. To run and reconcile with that, mid teen returns on what kind of equity check? And should we include the $225,000,000 that you've paid as part of that equity, as part of the denominator in that ROE?
Yes. I mean, certainly the $225,000,000 is part
of the total cost of
the project. There will be construction costs that go in there. But you can imagine that given the competitive nature of this business that discussing specific construction costs or other assumptions would be sort of I think letting a little bit too much out of the bag in terms of competitors. So I'd say we'll try to be transparent. I think you probably have an assessment of your own as to what a megawatt cost to build or something like that.
But the $225,000,000 is part of just getting started and there'll be construction costs that get added to that as we go forward.
Or sorry, maybe this might be a little more palatable way to ask it. What about like an equity contribution as like a percentage of the capitalization? I know you have ITCs in the capitalization, but is we're thinking fifty-fifty, thirty-seventy, kind of high conceptually?
Yes, Julian, I'll try it another way. We're not going to sort of disclose the financing construct of our bids. But we are saying that the dramatic increase in our core business CapEx coupled with the cost estimates that we have to build out the offshore wind, suggests that we want to do about a $2,000,000,000 equity issue during this 5 year window to continue to maintain the look at 1, 3, 5, 10 year performance of outperforming the index and outperforming the S and P 500. And I go back if you look at 20 years, I was CFO of mSTAR 20 years ago. I think the results, the performance results are even more dramatic.
So there's consistency and I believe credibility given the track record. And while the financial performance has been top tier, for the majority of that window of time, we're also in the top tier in terms of financial condition. So we've put together a financing plan here that is going to allow us to again be a top tier financial performer at the same time of having a top tier credit rating. So the financing is a fungible, right, in terms of we have cash needs, whether it's core business or whether it's offshore wind. And what we've sized here, I think, is one that's going to allow us to continue the wonderful track record that we've had.
And we've got commitment and conviction to deliver on that 5% to 7% earnings growth dividend growth that we've had going for so many years.
If I can just
jump in real quickly on
the 5% to 7%, obviously, you're rebasing off the 325%. How are you thinking about the sort of the shape of that to get to the midpoint? I mean you just raised CapEx at the same time raising equity. It seems like it's about a nickel decline versus the prior baseline for 2020 and 2021. But I'm sort of curious as you see this out play out through 2023, are you still saying it's midpoint of that of 5% to 7% versus the prior baseline?
Yes, yes, we are. Absolutely. And again, just in terms of the rebaselining comment, I mean, traditionally, our track record has been that each year we would move into the new year and then add another year. And this year, we're adding 2 more years into that. So it's very traditional as to how we've addressed giving you the long term guidance.
But certainly conviction in a stable way with being at the
delivering.
All right, excellent. I'll leave it there. Thank you all very much.
Thank you, Julian. Our next Our next question is from Stephen Byrd from Morgan Stanley. Good morning, Stephen.
Good morning.
I wanted to talk about offshore wind as well. And just conceptually, with your partnership with obviously is a very accomplished offshore wind developer. At a high level, how have you all determine the allocation of risk? Is it sort of essentially a true partnership where all risks are shared equally between the partners? Or is there a bit of a different delineation in terms of responsibility and risk between the two partners?
It's a shared risk fifty-fifty. We collaborate on various bench into the RFP, the basis for it, the returns that we expect from those bids. So it's a true fifty-fifty partnership from a risk perspective.
Understood. And then when I think about the permitting process, I'm just not familiar with everything that would be involved or sort of other approval elements and just thinking through permitting risk and other risks here. At a high level, again, don't need to go through every permit, but how do you think about execution risk for these projects? You obviously have PPAs in place, which is a huge element here. But how do we think about the potential risks of execution here?
That's about 24 month permitting and citing calendar and site assessment work that has to go on. And then the U. S. BOEM is a key agency. And then you get state and local permitting as well.
Construction then is another 20 4 months. So right now where we are in the cycle is we expect South Fork site to be finished by the end of 2022 on that calendar. And the Revolution win, which is the larger one, 700 megawatts of PPAs to be done by the end of 2023.
Okay, understood. And then just one last question just on Northern Pass. You highlighted on a slide, which is really helpful, all the permits and I guess the two next that I'm thinking about are the New Hampshire Supreme Court review and the Army Corps of Engineers process. Would you mind just talking a little bit further about next steps there and sort of we think about those 2 pending processes?
Sure. So the process has kicked off at the New Hampshire Supreme Court. They agreed to hear our case. We received briefs on the And then there really is no precise deadline or timeframe that's required for the court to decide, but we would expect some decision to be by the end of the year type of thing. So the Army Corps permit is really there's been a preliminary assessment of that.
And really, this stage, once all of the other approvals are made, we don't see any issue in moving through that Army Corps permitting process.
Great. That's all I had. Thank you.
Thanks, Stephen. Next question is from Praful Mehta of Citi. Good morning, Praful.
Good morning, guys. How are you doing?
Good, Praful. How are you?
Great. So sorry, but I'm going to dig into a little bit of the offshore wind again. I think the question from my side is more conceptual as in you really on this call gone headlong into offshore wind, right? The focus on offshore wind has increased significantly, obviously, the partnership with Orsted. And I think the skeptics still there are plenty of skeptics on offshore wind more around the concerns on execution risk.
Clearly, it's been done in Europe, but the risks around large projects, execution approvals still seems to be pretty high among investors in the U. S. How would you how did you get comfortable with that risk? And do you believe that there would be that this would be executed on time, on budget? Or do you see any big risks that are out there
that you worry about?
Yes, I think it's a good question. I do think it's important to note that while there was a lot of discussion of the offshore wind, what's particularly notable is that the dramatic increase in our core business CapEx for the 3 years in particular, it's about 25% increase for the next 3 years, and that's driving a lot of our growth prospects along with the rate platforms that we have in place. Has a long track record in many countries of going through the siting process of delivering on projects and actually coming in under budget and on schedule. I understand that it's a new process here in the U. S.
The sense that we get is that the policymakers, in particular in the states in New England, have a very strong appetite for more offshore wind. We've been through some of the site assessment plan already in 2017, has been actually completed already. So we're basically right where we thought we'd be from a signing and permitting perspective. And I think there's a lot of excitement around the demand and the interest in offshore wind. We're making commitments in the various states in terms of economic development, etcetera.
So I have reason to believe that the spending that we have in the plan of 2022 and 2023 is likely to take place as we go through the permitting process and begin construction.
Just to add a couple of things to that another, more information that you have and the more certainty you have going into the process certainly reduces the risk exposure. And we've been at this for multiple years, 3 years, basically to do a site analysis to start the ball rolling in terms of permitting. So the lack of surprises there to somebody who maybe has just been a winner of lease who has bid in, but really hasn't been able to do multiple years of wind and seabed assessments and those types of things. So another comfort factor I'd add would be the amount of preliminary engineering and preliminary work that has identified and moved forward on a number of these items.
Got you. That's super helpful color. And just in terms of returns, clearly the returns sound pretty good based on the current views of the and the forecast. Is there in your assessment given you've done so much analysis on it, where are the big levers that could drive returns downwards or upwards? Is it just construction or are there other factors that we should be thinking about as well?
Certainly, construction is a big element in terms of and as Jim mentioned, our track record and for our projects being completed on time and on schedule and Forestead's track record for completing projects on time and on schedule are pretty high up on the list. So construction costs could be one element.
It could, but we have a fair degree of comfort, did a lot of due diligence with our Board in terms of entering into this deepwater transaction. And I think what's important to recognize is that now with we have the 12 closest leases to the mainland. That means that the construction costs, the water depth are appealing in terms of a build out. We were it's worth noting that the lease that we entered into in 2016 cost us $600,000 And again, it's a lease that's very close to shore. Leases that are around another 20 to 25 miles in deeper water, more transmission costs just sold a couple of weeks ago for $135,000,000 a piece.
So I think that's a pretty good indication that there's a lot of value here that there's robust interest in offshore wind build out. And we have some significant advantages in cost and construction because of the locations of our 2 appealing leases.
Got you. That's super helpful again. Thanks so much guys.
Thank you, Praful. Our next question is from Antoine Arman from Bank of America. Good morning, Antoine.
Hey, guys. Thanks for taking my question. I just wanted to get a quick sense of new debt financing needs this year beyond the maturities.
Typically, we don't give a precise schedule of our debt financing needs throughout the course of the year or the exact timing of it. But I do expect that for the maturities that we have, we have $800,000,000 of maturities that we would be financing refinancing those. And depending on levels of short term debt, we could be doing issuances that are incrementally higher than that. So most of those would be at various operating entities who have needs because they have their own construction programs and they dollars 800,000,000 is what the maturities are, and I would expect we'll probably do something above that to keep our short term debt levels down.
Got it. And then over the 5 year period, so you have $12.75 of CapEx. You have this $2,000,000,000 of equity, dollars 500,000,000 combined of treasury shares. And then I mean cash from ops, you're probably doing at least $2,000,000,000 $2,000,000,000 a year. So if you had a diesel all up, you have very limited incremental debt issuance over the period.
Is that a right way to think about this?
Yes. And then we have, as we've mentioned a few times, that we are additive to that $13,000,000,000 capital plan is the build out of the offshore wind that I didn't hear in that list of items. Got it. Okay. Thank you.
Thank you, Antoine. Next question is from Angie Storozynski from Macquarie. Good morning, Angie.
Good morning. No questions about offshore wind for change, but a different angle. So would you be interested in expanding your T and D businesses in New England, if there were to be potential asset sales in New England?
Hi, Angie. This is Jim. We would be obviously interested at the right price in terms of expanding IT and D as our core business. We have a long, long track record of being a disciplined bidder when you look at the transactions that we've done. 20 years ago, a company that formed NSTAR was done and is seen as hugely positive over that 20 year period.
7 years ago now, we did the deal that merged NU and NSTAR into what's now Eversource, again, a deal that was widely recognized as being a big win for investors as well as customers. And then we did the water acquisition deal that we did last year, which 2 to 4 was delivered on. It was accretive to earnings in the 1st year as we had indicated and the actually earnings performance outperformed our budget or our expectations for that business. So whether it's T and D or the water business, we think our core platform is a successful one and we would be interested in extending. But there have been dozens and dozens of transactions in this region that have taken place that we didn't win because, again, we're a disciplined bidders.
So it will all come down to the value that we can bring to the transaction and what the asking price would be for the acquisition.
But none of this is envisioned in or embedded in that $2,000,000,000 of equity issuances, right? That this is just to finance your current CapEx plans and then you're not trying to shore up your balance sheet for a potential M and A deal?
No. It's strictly for, as I mentioned, the capital plans we have and the investment activities that are in the 5 year horizon.
Great. That's all I have.
Next question is from Andrew Weisel from Scotia Howard Weil.
Hey, good morning, everyone. That was a long time to not talk about offshore wind, kidding of course, but just 1 or 2 going back to that topic. Obviously now owns Black Island and is interested in developing offshore in the mid Atlantic. Would you consider expanding beyond New England and New York or are you going to stick to your former corporate name of Northeast Utilities?
So, well, Northeast Utilities is an old name. But certainly the assets that we acquired in the transaction with were the deepwater Northeast assets. There were other assets that were not part of the transaction. So we see our competency in this particular region as opposed to across the U. S.
Proximity was
a factor. There were other leases that did bought in the process that were further down the East Coast from the Mid Atlantic area, and we didn't buy into those proximity is important. These two leases are right off the coast of Massachusetts and Rhode Island, close to our own core operations. So, that was a factor in the decision at this point.
Okay. Then I know that you guys are very confident that the construction will be on time and on schedule. My question is mechanically or procedurally, what happens if you're not able to deliver various PPAs? In other words, how does each state treat that potential scenario where the turbines aren't spinning on time?
I think, this is Lee, Andrew. The issue of the PPAs has certain provisions and that essentially require you to post more credit, letter of credit. But the penalties are relatively speaking to the investment are minimal if you don't meet the in service dates.
Okay, very good. Then just a quick one on the equity. If I heard correctly, Phil, I think you said that DRIP needs would come from the treasury stock. For the bulk of the $2,000,000,000 number though, should we expect block issuances as needed or would it be more like an equity forward deal?
There are many different ways of doing that, whether they be block trade or road shows or forward or so in terms of an ATM kind of program. So not really describing specifically the intent, but certainly all of those would be or the method, all of those methods would be evaluated and we would move forward again opportunistically been? It's $90,000,000 to $100,000,000 annual.
Next question is from Paul Patterson from Glenrock.
All right,
Paul. Just a few quick ones. The ROE in New Hampshire, you guys said that you're under earning your allowed. I was just wondering, could you tell us what it was for 2018?
We've just filed our numbers are in the process of doing it. I'd say it's just shy of 8%, it's below 8%.
Okay. And then with respect to I know that grid mod is not in the Connecticut or New Hampshire in your forecast. But I also noticed that the grid mod docket has sort of been held in abeyance for some I'm not clear why, could you sort of elaborate a little bit more what might be going
on there? Yes. I'd just comment that with the new governor coming in, there have been some changes. The former chair of PURA has now taken a more significant job as the commissioner of DEEP. So I think it's got to do with the changes organizationally that happened with the
when the new administration comes in. Yes. And in New Hampshire, they typically have a smaller staff than any of the other states. And in fact, just recently, they started to move forward in a more active way in terms of draft physician papers that would require more studies. So it's moving along and there's no particular reason other than staffing at this stage.
And then I think after this year, you're expecting O and M to be flat. Is that tied in any way to the CapEx that you guys have been investing? Or is that just the savings that you guys are doing from just what you guys have often been doing in terms of cost containing?
Well, certainly, I did highlight on the call that certainly the CapEx investment has driven improvements in high levels of reliability and safety and performance for our customers, but it also helps in terms of taking other costs out of the business. If you repair something that you don't have to go visit 2 or 3 times to repair, if you replace it, you'd have some O and M savings. So certainly, the O and M gets reduced as a result of it. So being flat is really a challenge because you've got inflation, you've got negotiated wage increases. So really you're taking kind of 2% to 3% of cost of the business just to stay flat.
Okay. And then just on the offshore wind, are you guys thinking of doing firm EPCs or anything like that with respect to the execution of the actual build out or how do you guys look at that? I know you mentioned that this and what have you has got a good track record. But other than that, I'm just wondering any idea from EPCs or how should we think of that?
Yes. Paul, this is Lee. I think the way to think of that is that brings all of the resident competencies that they need. They're just coming up building or in the process of building over 2,200 megawatts off of the U. K.
Alone. And again, as Jim said, all on schedule, below budget, and so they're in very good shape. For them, it's a core expertise. It's what they do. So it really wouldn't make any sense to bring in an EPC.
There are other developers
that clearly will have to bring in an
EPC because they just don't have
the the capacity factor, just could you remind me what it is that you guys are expecting for wind offshore wind?
Capacity factors, they're on the range of 45% to 50% capacity factors on the wind and it's higher in the winter when prices are the highest in the region including New York. And so there's a great benefit in that winter period for liability and price suppression as well.
Okay. And then just finally, weather adjusted sales growth for 2018, could you tell us what that was?
I didn't tell you what it was. But for electric, Paul, it was and again, I'll preface my answer by saying, as a result of our rate plans that we have in place, 90% of our revenues, all of Massachusetts, all of Connecticut are decoupled. So really weather has no impact. Only New Hampshire is the only jurisdiction that is still is not decoupled. But weather adjusted normalized for the year was down slightly like 0.2%.
Okay, great. Thanks so much.
Thank you, Paul. Next question is from Travis Miller from Morningstar. Good morning, Travis.
Good morning. Thank you. I'll return to the offshore wind, if you don't mind. The agreement with Orsted outside of the projects in the works right now, when we're thinking about that CapEx beyond and thinking out to the big potential, what type of obligation as part of that deal with the partnership with Do you have an obligation there to invest if, say, Orsted were to make a decision to go forward?
No. No. With any opportunity, we'd have the right to participate or not. There's no commitment or obligation to fully build out the 4,000 megawatts. We'd have an option to proceed or not.
Okay. On your own based on your own economics and decision. Okay. Okay. And then in terms of Northeastern states to kind of promote offshore winds?
Eastern states to promote offshore winds such that you could make it easier to go forward? Or are you going to be competing with other renewable sources on some of those non identified projects?
Yes. Well, there's been a here. There's clearly been offshore wind specific RFPs. The State of Massachusetts was the first to legislate it. 1600 Megawatts needs to be bid and it's specific to offshore wind.
They've completed 800 of that with the first solicitation. We expect the next one to occur in the first half of twenty nineteen here. Additional legislation in Massachusetts has asked the Department of Energy Resources to take a look at doubling that number to go to 3,200 Megawatts. The State of New York has legislated 2,400 megawatts that they're going to do through multiple solicitations. Connecticut and Rhode Island have been active as well.
In New York, the governor has actually suggested that he thinks that state should go to 9,000 megawatts, although only 2,400 has been legislated to date. So the policy is in the form of offshore wind solicitations. One of the Connecticut solicitations that took place last year had offshore wind, among other clean energy resources. And in that instance, our Revolution Wind Project won an additional 100 megawatts, but there were also solar and nuclear commitments in that process as well. So the majority of
governor Governor Lamont filed a bill yesterday, a Senate bill that would add additional 1,000 megawatts of offshore wind. So that's firming up as well.
Okay, great. And those 1,000 megawatts of pure offshore wind?
Pure offshore wind.
Great. Okay, thanks a lot. Appreciate it.
All right. Thanks, Travis. Next question is from Andy Levi from ExodusPoint. Good morning, Andy.
Hey, guys. Can you hear me? Yes. Okay. And I apologize if this was answered already.
I've just been popping around. So just back on the equity, how much of the $2,000,000,000 is allocated for the offshore wind
that's coming out? Yes, there is no specific allocation, Andy, is the direct answer. We would look at our total portfolio of construction and investment needs, which we've said is $13,000,000,000 over the next 5 years for our CapEx and then add on to that the build out our share of the cost of the 8 30 megawatts of build out of the offshore wind. So looking at the total pot is where we would focus, not to specifically assign it to an area.
No, no, I understand that. But if you didn't have the offshore wind, how much equity would you be issuing?
But you're asking it the same way, only differently.
No, you could, Phil.
As I said, the $2,000,000,000 of equity supports kind of our total CapEx and offshore wind for the next time.
Okay. So let me ask you a different way then. What's the proper capital structure for an offshore wind project?
So that one you did miss, Andy, because we talked
about that earlier. Okay. There you go. What's the bottom line on that?
That's a competitive process. Obviously, we're not
going to
close the cap structure of all the capital costs.
But I guess your return on investment or however you measure it must be based on kind of how you finance it, right?
Correct.
Okay. But that's not that's something at some point, will you share that with us?
Yes. We've been saying based upon actually, Austin has disclosed an 8% unlevered IRR, which is going to give us a return that we think would be transmission like or better when you look at sort of the returns equity that we expect
there.
Okay. And that's assuming that everything goes as planned? Or do you have a contingency built into that?
We work with Mostech to build in appropriate contingencies not only in terms of spending, but in terms of schedule.
Got it. Okay, that's very good. Thank you very much.
Thanks, Andy. Thanks, Andy. Next question is from Mike Weinstein from Credit Suisse. Good morning, Mike.
Hey, Just one quick follow-up. I just wanted to have you explicitly say that, just confirm that you basically have offshore wind additional offshore wind in the equity number, but it's not in the CapEx plan, correct?
That is correct. It's not CapEx, it's equity investment.
Right. So there's a certain amount that's that's why the equity might look high to some people because it's not in as part of that $12,000,000,000 to $13,000,000,000 CapEx plan?
That's exactly correct, Mike.
Okay. But you're not saying how
much? That's correct also, yes.
Okay. Okay. Just wanted to get that out there. Thank you.
Thank you. All right. Well, thank you very much for joining us today. If you have any follow-up questions, feel free to give us a call or send us an email. We look forward to seeing you at the conferences in early March.
Take care.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.