Eversource Energy
Q4 2016 Earnings Call Transcript

Published: 23 Feb 2017

[Operator:]

Welcome to the Eversource Energy Fourth Quarter Earnings Call. My name is John, and I'll 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. Please note that this conference is being recorded. And now, I will turn the call over to Jeffrey Kotkin.

[Jeffrey R. Kotkin:]

Thank you, John. Good morning and thank you for joining us. I'm Jeff Kotkin, Eversource Energy's Vice President for Investor Relations. We posted a slide deck on our website last night, and we'll be referencing those slides this morning. Now, as you can see on slide one, some of the statements made during this investor call maybe 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 result to differ materially from forecast and projections. Some of 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 31, 2015 and 10-Q for the period ended September 30, 2016. 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 on our website under presentations and webcast, and in our most recent 10-K. Turning to slide two, speaking today will be Jim Judge, our President and CEO; Lee Olivier, our Executive Vice President for Enterprise Energy Strategy and Business Development; and Phil Lembo, our Executive Vice President, CFO and Treasurer. Also, joining us today are Jay Buth, our Vice President and Controller; and John Moreira, our Vice President of Financial Planning and Analysis. Now, I will turn to slide three and turn over the call to Jim.

[James J. Judge:]

Thank you, Jeff, and thank you all for joining us this morning. I want to take a few minutes to provide some high level comments on our 2016 accomplishments and our outlook for 2017 and beyond before turning the call over to Lee and Phil to provide the details. Let me start with slide four by discussing our long-term vision to Eversource Energy. We aspire to be the most successful and respected energy company in the country. I think that involves Eversource becoming the primary catalyst for low-cost clean energy development in New England. We expect to provide our 3.7 million electric and natural gas customers with superior service, which means top tier reliability, prompt and responsive customer service, helpful insights into what drives energy use, and how customers can utilize their energy more efficiently. We expect to partner in executing the energy strategies of the three states we serve. And finally, we will help strengthen our communities, not just on energy issues but to support civic and charitable needs that are important to the economic vibrancy. For investors, we expect to continue to provide you with the best risk adjusted returns in the industry with very strong earnings and dividend growth, paired with growing cash flows and an attractive balance sheet. As you can see in last night's news release and on slide five, we project annual earnings growth of 5% to 7% through 2020 using the $2.96 per share we earned in 2016 as the base. We're confident that such a growth rate is very well founded and achievable under a wide range of scenarios. Phil will provide you with some of the sensitivities shortly. As you can see on slide six, we raised the common dividend by 6.6% last year, and earlier this month our board approved an additional 6.7% increase for 2017. These increases are consistent with our goal of raising the dividend at a rate that is consistent with our earnings growth. Our payout ratio of 60% is relatively low for a regulated electric and gas company, and our S&P ratings are the best in the industry, which illustrates the depth of our financial strength. We chalked up a number of accomplishments in 2016 that were consistent with our long-term focus. In terms of operations, you can see on slide seven that we continued to provide top tier service reliability for our customers, and introduced a number of enhancements that will allow us to respond more quickly to routine and emergency requests. We completed our $2.2 billion capital plan for the year. We managed well within our operating budgets, which largely offset the negative impact of one of the warmest first quarters ever in New England, allowing us to finish 2016 within the earnings guidance that we provided to you a year ago. Since our merger in 2012, we have reduced annual operations and maintenance expense by approximately $250 million, even while measures of service quality have improved and some have improved dramatically. We also made significant progress in 2016 on our strategic initiatives. In December, we announced the formation of Bay State Wind with Danish Oil and Natural Gas, the world's leading developer of offshore wind generation, to develop 300 square miles offshore wind site on a continental shelf south of Cape Cod and the islands. We will bid the project into the initial Massachusetts RFP for offshore wind this summer. Also in December, we received Massachusetts regulatory approval for the construction of 62 megawatts of additional solar generation. While in New Hampshire, regulators reiterated their support for the sale of 1,200 megawatts of PSNH's mostly fossil generation. Also, in New Hampshire, the Site Evaluation Committee appears to be solidly on a path to issue a decision on Northern Pass within the next seven months. When taken together, you can see how we continue to position Eversource Energy as the leader in supporting our region's rapid development of clean-generating sources. Reducing the region's carbon footprint requires other initiatives as well. First, it requires increased access to natural gas to provide both base load energy and balancing resources that allow for the construction of more wind and more solar sources. It also requires increased pipeline capacity to provide customers with the opportunity to change their primary heating source from oil to natural gas. As we will discuss, we had some disappointments in 2016 on Access Northeast. But we and our partners Spectra Energy and National Grid, firmly believe the project is critical to enabling the region to meet its energy goals, and to keep energy affordable for our customers in the winter. We all remain committed to its success. As Phil will discuss, achieving our financial, operating and strategic goals requires us to have strong trusting relationships with our policymakers, particularly, our state regulators. Three of the four electric distribution companies will have rate reviews this year. Given the strong record of reliability and customer service we have had over the past several years, and the significant reduction in operating cost that we have realized for customers, we are confident in achieving reasonable outcomes in these proceedings. For us, those outcomes will provide customers with continued improvements in service, as we continue to invest heavily in our distribution systems, while providing reasonable rate levels. Finally, I want to stress the talent of our 7,800 employees who delivered these excellent results, and I'm so glad as CEO to say they delivered them in a safe manner. 2016 was, in fact, our best year ever for employee safety. We went through a great deal of change in 2016, and we continued to perform extremely well. Last May, Tom May, stepped down from his great run as CEO, and when I became CEO, Phil seamlessly moved into the CFO role. We've been very successful lifting many of our operating metrics to the upper tier of the industry, while lowering our cost through standardization of best practices. Lee and his team continued to advance our new investment opportunities, whether they are Northern Pass, Access Northeast, Bay State Wind, Massachusetts Solar or new opportunities in electric vehicle charging infrastructure and energy storage. This strong performance explains why we're so optimistic about our future. Now, I'll turn over the call to Lee.

[Leon J. Olivier:]

Okay. Thanks, Jim. And before I start, I'll just say for an excuse me for my voice. I've been a little bit of whatever is going around here in February. However, I will provide you with a brief update on our major investment initiatives and then turn the call over to Phil. Let's start with Northern Pass in slide nine, and New Hampshire Site Evaluation Committee or SEC has set evidentiary hearing dates on the project which begin on April 4 and continue through July 21. We consider this schedule supportive of the SEC stated commitment to issue a final written order no later than September 30, 2017. The project also has secured a major legal victory on January 31 when the New Hampshire Supreme Court upheld a lower court decision, which found that the State Department of Transportation has exclusive authority to approve construction of utility facilities along and beneath state highways. Project opponents have claimed the utilities were also required to obtain permission of adjacent property owners to construct facilities in the public right of way. This was a very important ruling for the project since 60 miles of undergrounding we have proposed is largely under state and local roads. Since our last conference call, interveners have filed their testimony and we've had the opportunity to query their witnesses. Next week, several state agencies including transportation, environmental services, and historic resources are scheduled to file their recommendations on the project to the SEC. Governor Sununu continues to be a strong supporter of Northern Pass, recognizing the billions of dollars of economic benefits it will bring to the State, in addition to the significant reduction in the region's carbon emissions, about 3 million fewer tons of CO2 annually, even mentioned the need for Northern Pass and the lower electric bills the project will bring to make New Hampshire businesses more competitive in his inaugural speech. As you can see from slide 10, assuming we will receive a favorable decision from the SEC in September, we expect to receive the U.S. Department of Energy approval before the end of this year. With those approvals on hand, we expect to begin the construction early in 2018, and for the project to be completed by the end of 2019. Our new capital forecast shows capital expenditures associated with Northern Pass of about $680 million in 2018 and $800 million in 2019. We will have a better estimate on the final testing plan and in-service date later this year once we have more clarity on the SEC and the DOE approvals, and the equipment manufacturing schedule. We will bid Northern Pass into a clean energy RFP that Massachusetts will be running in the spring. Turning to slide 11, you can see that the legislation signed last August by Governor Baker authorizes the State's electric distribution companies to purchase 9.5 terawatt hours of clean energy with the full amount contracted no later than 2022. The initial RFP is scheduled to be released by April 1, 2017 or approximately five weeks from now. A draft RFP issued earlier this month calls for bids to be submitted by July 27. We believe Northern Pass is very well-positioned for this RFP, which specifically allows large hydro to be eligible. You will notice on the slide that the same legislation that created the April Clean Energy RFP also requires the state to issue an RFP by the end of June for a minimum of 400 megawatts of offshore wind with a full 1,600 megawatts contracted by 2027. As you can see on slide 12, and as Jim discussed earlier, we announced in December a partnership with DONG Energy of Denmark, the world's leading developer of offshore wind generation to develop a 300-mile square track, 15 to 25 miles south of Martha's Vineyard. Our Bay State Wind partnership calls for us to share 50-50 in all development costs and associated benefits. Bay State Wind ultimately can own enough wind turbines to generate at least 2,000 megawatts of clean renewable power. This area is attractive because the water depths are relatively shallow about 30 to 65 meters, and the wind speeds are high and reliable, resulting in high capacity factors similar to base load generation. This is particularly valuable in the winter when electricity is more costly in New England due to our natural gas pipeline constraints. We expect that once a winner or winners are selected, contracts with Massachusetts electric companies will be filed with the DPU in the first half of 2018, with commission with approvals later in the year. We will expect the permitting would take several years with construction not starting until after 2020. As a result, the capital forecast released today does not reflect Bay State Wind construction expenditures in it. While our offshore wind opportunity is a number of years out, we expect it will be very significant as New England States continue to push toward a 75% to 80% reduction in carbon emissions by 2050, offshore wind will become an increasingly attractive option. The experience in Europe showed a 50% reduction in construction cost over the past four years as a supply and network was built up. Turbines became larger and construction techniques improved. Wind sites off of southeast of Massachusetts are much closer to New England's load centers than onshore wind sites in Northern New England, and involve much less transmission construction and potential for scheduled delays. As a result, we expect offshore wind to be a very competitive renewable source of power in the Northeast. Massachusetts also views offshore wind as a significant economic development opportunity. Bay State Wind and two other firms that have secured offshore wind tracks south of Martha's Vineyard, have identified New Bedford in Southern Massachusetts as one of its potential staging areas for offshore logistics and construction. Other states may also consider energy and economic benefits of this opportunity as well. From Bay State Wind, I will turn to Access Northeast in slide 13. You may recall that three of the New England States, Connecticut, Rhode Island and Maine passed legislation in recent years, explicitly allowing their respective electric distribution companies to sign long-term contracts for a natural gas pipeline capacity. Each of these states has shown strong support for modernizing the region's natural gas pipeline infrastructure to improve energy reliability, reduce carbon emissions from coal, oil generation and lower price volatility, and total energy cost for customers. In fact, the main PUC last summer voted to move forward with Access Northeast. Unfortunately, there is currently a lack of uniform energy regulatory policy across the New England States. In Massachusetts, the Supreme Judicial Court ruled in August that the state's electric distribution companies could not sign such contracts. And a couple of months later, the New Hampshire Public Utilities Commission said, they could not approve such contracts under current law. As a result, our focus is on developing new path forward that would continue to include participation of all New England States. One option involves pursuing a change in the laws in Massachusetts and New Hampshire so that they align with statutes (17

[Phil Lembo:]

Thank you, Lee. And today I have a few topics to cover; one would be our fourth quarter and full year financial results. I'll talk about our 2017 and long-term earnings guidance, growth guidance. I'll give you an update on several of our transmission projects, discuss several of the key state and federal regulatory dockets that we have pending, and provide some color on our new capital expenditure and transmission rate base forecast. So, let me start with the quarter on slide 17. We earned $229.2 million or $0.72 per share in the fourth quarter of 2016 compared to earnings of $181.8 million or $0.57 per share in the fourth quarter of 2015. Our transmission segment earned $0.33 per share in the fourth quarter of 2016, that compares to $0.25 per share in the fourth quarter of 2015. One of the – two primary drivers for this earnings growth was higher transmission rate base which is due to our continued investment in the reliability of the New England power grid, and I will update you on some key reliability-driven projects in a minute. But the other principal driver was a settlement approved by FERC last month that allows us to recover certain merger-related costs through our transmission rates. The settlement added $0.05 per share in the fourth quarter. FERC had previously allowed recovery of these costs beginning in June, and we had started recording that at that time, but it was subject to a final decision. On the Electric Distribution and Generation side, we earned $0.26 per share in the fourth quarter of 2016 compared with earnings of $0.28 per share in the fourth quarter of 2015. Fourth quarter results decreased in 2016 primarily due to higher depreciation, property tax, interest and bad debt expense, and partially offset by some higher distribution revenues in the period. On the Natural Gas Distribution side, we earned $0.08 per share in the fourth quarter of 2016 and that compared to earnings of $0.05 per share in the fourth quarter of last year. Although still somewhat warmer than average, temperatures in the fourth quarter of 2016 were much colder than during the same period of 2015 when we experienced by far the warmest December on record. Cold temperatures in 2016 resulted in 22% increase in the fourth quarter from natural gas sales in 2016 as compared to 2015. At the Eversource parent and other, we earned $0.05 per share in the fourth quarter of 2016 compared to a slight loss in the fourth quarter of 2015. We benefited this year from a lower effective tax rate and the absence of $8 million of integration cost that were recorded in the fourth quarter of 2015. Turning from the fourth quarter to the full year results, we earned $942.3 million or $2.96 per share in 2016, compared with GAAP earnings of $878.5 million or $2.76 per share in 2015. Those 2015 earnings included $0.05 per share in integration cost. Transmission earnings totaled $1.16 per share in 2016, compared with earnings of $0.96 per share in 2015. In addition to a higher rate base, 2016 results benefited from the absence of a $0.04 charge that we recorded in 2015 related to a FERC decision, the first return on equity complaint against the New England transmission owners, from the recovery of merger-related cost I mentioned earlier. On the Electric Distribution and Generation segment, we earned $1.46 per share in 2016, that compares to $1.59 per share in 2015. The decline was primarily due to the absence of $0.12 per share of benefits that we recognized in the first and fourth quarters of 2015 as a result of resolving multiple regulatory proceedings at NSTAR Electric, primarily involving recovery of bad debts and infrastructure investments. Additionally, higher depreciation and property tax expense resulted from our ongoing investment in distribution system reduced full year earnings by $0.07 per share. On the Natural Gas Distribution segment, we earned $0.24 per share in 2016, compared to earnings of $0.23 in 2015. Rate increase at NSTAR Gas, and continued customer growth was partially offset by much milder first quarter weather in 2016 impacting those results. At the parent, we earned $0.10 per share in 2016 compared to a loss of $0.02 per share in 2015. Much of that change was related to the absence of approximately $15 million of integration cost in 2015. We also benefited from lower effective tax rate during the year. O&M continues to be a good story, positive story for us and it was again in 2016 as our employees continued to provide excellent reliability for our customers while also reducing costs. Lower O&M added $0.08 per share to earnings in 2016, really, if you would exclude the benefits we recorded in the first and fourth quarters of 2015 when regulatory orders allowed us to reduce the level of bad debts at NSTAR Electric by more than $35 million on a pre-tax basis. So, positive O&M story again in 2016. Turning from our financial results to operations. Our transmission investments totaled approximately $900 million in 2016, and that compares to approximately $800 million in 2015 and $700 million in 2014. As you can see on slide 18, we progressed very well on a number of major transmission reliability projects during the year. Through December 31, we invested $134 million in 28 different projects that together comprise the $560 million Greater Boston Reliability Solutions suite. We expect to conclude the final Greater Boston work in 2019. We've invested $117 million through 2016 in the Greater Hartford projects, which again are a variety of 27 different projects, which together we expect to complete in 2018 at a cost of approximately $350 million. All these projects listed here are progressing very well, according to budget and schedule. From operations, I'll turn to our regulatory activity and start in Massachusetts in slide 19. On January 17, we filed electric rate reviews with the Massachusetts DPU for NSTAR Electric and Western Mass Electric. While we filed two different sets of rate schedules, we've notified the DPU and FERC that we are seeking to legally merge the two companies in 2018. From an operations perspective, they currently are operating on a integrated basis and providing excellent service to our 1.4 million electric customers in the Bay State. The rate review costs were an increase, modestly, (30

[Jeffrey R. Kotkin:]

Thank you, Phil. And I'll turn the call back to John, just to remind you how to enter questions. John?

[Operator:]

Thank you. We will now begin the question-and-answer session.

[Jeffrey R. Kotkin:]

Thank you, John. Our first question this morning is from Mike Weinstein from Credit Suisse. Good morning, Mike. Michael Weinstein - Credit Suisse Securities (USA) LLC Hey. Good morning. Thanks for the very thorough update. First question is on the transmission ROEs. Are you expecting any kind of impact from the loss of a quorum at FERC on the outcome for complaints two and three?

[Phil Lembo:]

I'm sorry, Mike. Could you – I think you broke up there for a minute. Could you repeat that? Michael Weinstein - Credit Suisse Securities (USA) LLC Oh, yeah. Are you expecting any kind of impact from the loss of a quorum at FERC on the outcome for the ROE transmission complaints numbers two and three?

[Phil Lembo:]

Okay. That's the part I missed. Just in terms of – as I said in my remarks, we had expected and we had indicated we may get that decision in 2016. So, without a quorum it's really anybody's guess as to when an order will come out. So, I think impacts would be sort of on a timing basis, but certainly the nature of who fills those seats could be impactful also. So, we'll have to just wait and see, but we're expecting some decision in 2017 on those. Michael Weinstein - Credit Suisse Securities (USA) LLC Right. And then, separately, on Access Northeast. I'm sorry, if I missed this. But have you guys discussed like what's the next step there in terms of getting LDCs to contract for it or moving forward?

[Leon J. Olivier:]

Mike, this is Lee Olivier. We're having, are having conversations with LDCs. We're have – moving in both (47

[Leon J. Olivier:]

Yeah. I think, the New Hampshire will move along is in a successful way. I think it's really, once that report comes out, it's really going to be – show the significant impact that New England will face without additional gas pipeline capacity. Michael Weinstein - Credit Suisse Securities (USA) LLC Right. And I wonder if you could comment a little bit on the Connecticut Legislation that will allow the contracting of nuclear for clean energy purposes and where do you see that going forward at this point?

[James J. Judge:]

Yeah. This is Jim, Mike. We did file a testimony, provided testimony of that proceeding. I think the fundamental question is one of need. I think if Dominion can show sort of a need for some supplemental revenue stream, it makes it more compelling I think for their argument. But there is already an existing process to follow in the region and that is through the ISO New England process. If they are actually planning on retiring the plant, they could file for that with ISO New England. ISO New England could choose to give them a must-win (50

[Jeffrey R. Kotkin:]

All right. Thanks, Mike. Our next question is from Julien Dumoulin-Smith. Good morning, Julien.

[Julien Dumoulin-Smith:]

Hey. Good morning, Jim. So, perhaps just to follow-up a little bit on what Mike was getting at a second ago. Can you elaborate a little bit with regards to Access Northeast? Is it possible to get just gas LDCs to make this project work? Or to what extent ultimately are you dependent upon getting success in Massachusetts one way or another to get this project on (51

[Leon J. Olivier:]

Yeah. Julien, this is Lee. Your first question was, can you make it work with just the LDCs? The answer to that is no. We cannot make it work with just LDC load. There's not enough LDC load to do that. So, that will not work in itself (52

[James J. Judge:]

Yeah. Julien, just if I could add in terms of the commitment, this report, I guess, that came out of ISO this week, the ISO CEO says that he is concerned about keeping lights on in the coming winters. So, that creates a great degree of concern here. And at Eversource, we remain committed to the project. Also, if you look at what Spectra is saying in terms of its commitment, I think, their earnings release emphasized the commitments to pursue a viable commercial model here to resolve the issue and the need that exists in New England. Clearly, this is the last standing project, if you will, and it's the least, I think, onerous in terms of it being a brownfield project. So, we continue to remain optimistic. As Lee indicated, there's actually a couple of potential paths to success here, and we're actively looking at all of them.

[Julien Dumoulin-Smith:]

Got it. But just to be clear about it, for Massachusetts to be committed to the project vis-à-vis the rest of the region, that will be more than just an LDC commitment?

[James J. Judge:]

Yes. That's correct. And then you, essentially you need EDC load to make this thing work at Massachusetts. We have to be committed to pay its load share percentage of that.

[Julien Dumoulin-Smith:]

Got it. Excellent. Moving on to Northern Pass quickly, can you describe a little bit the latest on the potential cost dynamic with further undergrounding? As I understand it, I suppose this is still on the table in terms of a conditional approval under the SEC (54

[James J. Judge:]

Yeah. I would just say, Julien, we're not anticipating any significant increase in undergrounding. Clearly, we believe that if you underground the entire route, the project is not viable when you do that, when you add in the additional cost. So, we're not really pricing that out. I mean that'd be $2 billion plus project. It's not needed. We think there is growing support in New Hampshire for the project. Certainly, we have a new Governor that has voiced that support. We've been very successful in the challenges that we received against the project and the litigation. So, we're not anticipating significantly more undergrounding on that project. In terms of the price, the cost of the project, we have still maintained approximately $1.6 million. Anything above and beyond that would be confidentially retained because again we will bid this (56

[Julien Dumoulin-Smith:]

Got it. Thank you all, very much.

[James J. Judge:]

You're welcome.

[Jeffrey R. Kotkin:]

Thanks, Julien. Our next question is from Greg Gordon from Evercore ISI. Good morning, Greg.

[Greg Gordon:]

Hey. Good morning, guys. Again, I would like to also reiterate the really thorough update, so thank you. Looking at slide 25, it looks like if I just do a simple algebra, the rate base growth forecast, including Northern Pass but excluding any Access Northeast or Bay State Wind capital, it is about a 6% rate base CAGR, which assuming that you can continue to earn consistent returns, and you're not issuing equity, which you said you're not, which you smack in the middle of the guidance range. Is that kind of the message you're trying to deliver over here?

[Phil Lembo:]

So, Greg, you were a little faint, but you're basically saying that the rate base CAGR is about 6% per year over the forecast period which supports the growth rate. Is that – and you're asking is that (57

[Greg Gordon:]

Right. I mean it seems like very straightforward message, right? 6% rate base growth, no equity issuance on consistent returns, that would put you right in the middle of your earnings growth target based on this rate base growth forecast, right?

[Phil Lembo:]

Yeah. We're not saying specifically what point would be in the range, Greg. But certainly 5% to 7% we're very comfortable with. The capital plan and what you've picked up in terms of the rate base certainly supports that. I also mentioned that we still have some run room in terms of cost savings, too. So, those would be the two drivers to be in that range.

[Greg Gordon:]

Fantastic. And then, at this juncture just given the time horizon it would take to get resolution on a theoretical yes decision on Access Northeast, at this point, would the capital spend sort of theoretically not really start to impact your ability to generate earnings until like the back end of this plan or maybe even into the 2020 type, 2021 type timeframe? Or do you actually think that there is a scenario where you could be in a go position to build that pipeline where it would have a tangible earnings impact inside this five year plan?

[Phil Lembo:]

Greg, this is Phil. I think in Lee's remarks he talked about not being in the front end of that process but more in the back end in terms of Access Northeast. So, I would say, your first assumption was accurate in terms of that would be sort of at the backend of the forecast that we provided.

[Greg Gordon:]

Great. Your comments on tax, Phil, makes sense to me, just the federal income tax exposure, but I just want to be clear. They did or did not encompass what might happen if you had increase in bonus depreciation to 100%?

[Phil Lembo:]

Yeah. I don't' think I commented on that and they're (59

[Greg Gordon:]

Okay, fine.

[Phil Lembo:]

But certainly, as you know, there's many options out there and some of these options would affect everybody in the industry. And then, there's some who have more of a T&D profile like us, where there's not much exposure. So, I did not cover that correct.

[Greg Gordon:]

Okay. Last question is for Jim. Do you think that Patriots are going to trade Garoppolo, and if they do are they going to let them stay in the AFC East?

[Phil Lembo:]

The Jets.

[James J. Judge:]

Probably for The Jets, it'd be the worst decision The Jets have made.

[Greg Gordon:]

I think there's been a lot of bad decisions. So, that's going to be inevitably tough at the top. But thanks, guys.

[Jeffrey R. Kotkin:]

All right. Thanks, Greg. Next question is from Chris Ellinghaus from Williams Capital. Good morning, Chris.

[Christopher R. Ellinghaus:]

Hey. Good morning, guys. How are you?

[James J. Judge:]

Hi, Chris.

[Leon J. Olivier:]

Good.

[Christopher R. Ellinghaus:]

Phil, can you just describe the weather for the fourth quarter. Was it close enough to normal that you didn't feel a material impact?

[Phil Lembo:]

For the quarter?

[Christopher R. Ellinghaus:]

Yeah.

[Phil Lembo:]

Well, actually, for the quarter, it was beneficial. It was kind of down from normal slightly. But it was up from the previous year but it was close to normal, but probably even a little bit below when you look at the heating degree days.

[Christopher R. Ellinghaus:]

Yeah. I meant, in terms of normal.

[Phil Lembo:]

Yeah. Yeah, so below.

[Christopher R. Ellinghaus:]

Okay. And Lee, with all of the sort of action in New England vis-à-vis Access Northeast and the gas contracting question. I mean, New Hampshire Legislation, ISO statement, and you were talking about sort of having an outreach with Massachusetts legislators. Does this maybe gives a momentum for Massachusetts to consider some legislation?

[Leon J. Olivier:]

I think the more education, that's a result they're on this issue creates an impetus. But clearly, I think the ISO New England action and their analysis that they're working on now will make a significant difference because the outcome of that analysis is going to say that the status quo we believe will say it's not acceptable. And if it's not acceptable, and if you want to ensure reliability, here's what you have to do and it's going to be expensive and it's going to create more emissions. So, for the folks that don't like gas and they want to see lower emissions, their outcome will create more emissions and that's what this – we believe this report will say. And if the state and the region wants to meet its goals of this 80% carbon reduction by 2050, you must have natural gas to back up renewable, and to ensure reliability and to ensure that the region stays competitive, and I believe that that report will state that clearly.

[Christopher R. Ellinghaus:]

Okay. And Phil, looking at O&M for the year, even adjusting for some of the unusual one-time 2015 sort of regulatory benefit, it looks like the reduction was a little bit less than sort of your targeted expectations. Can you just talk about what challenges there might have been in 2016, versus your sort of going forward expectations?

[Phil Lembo:]

Yeah. I think that, so it's pretty close in that range, Chris. But we had a significant level of storms during the year. So I'd say, when you ask what were some of the O&M challenges for the year, we had probably twice the level of storm activity in the region than we've had in past years, and that put some pressure on our response. People working overtime, having to travel, those type of things. So I'd say, if we had a more normal weather year, you'd see a lot lower O&M, and you'd probably also see some better, higher statistics too, in terms of outages because bad weather, and distressed trees cause limbs to fall and outages to occur. So I'd say that, that would be one of the items.

[Christopher R. Ellinghaus:]

Okay. Great. Thanks for the color, guys.

[James J. Judge:]

All right. Thank you.

[Jeffrey R. Kotkin:]

Thanks, Chris. Our next question is from Travis Miller from Morningstar. Good morning, Travis.

[Travis Miller:]

Good morning. Thank you. Just wondering about 2020, the transmission spend, that $283 million, is that more along the lines of a normalized run rate number kind of?

[Phil Lembo:]

No. I think that in any of our forecast, the out years gives maybe a little bit less clarity in terms of specific projects, Travis. But as we move through that forecast period, there'll be projects that are identified. I think, you probably know our history that until something is pretty clean line of sight, it won't get into the forecast. That's why we're so confident in it. So it'd say, it's more a case of to be determined some of those projects in that last year.

[Travis Miller:]

Okay. So like a building blocks, so you started the $283 million, and then add on, say, Bay State and add on (01

[Phil Lembo:]

Yeah. I think if I were to reconcile past forecast, that would exactly what would have been the case, correct.

[Travis Miller:]

Okay. And then what's the status right now in terms of the carbon goals for the region, the RPS in the states, where do you guys stand, on track, ahead, behind, now give me a sense for where you guys have been there.

[Leon J. Olivier:]

Each state is a little bit different. Connecticut, really as a result of the kind of the major transmission build out we did there over the last 10 years, and the retirement of a lot of the older oil and coal-fired power plants and the lack of uplift, their carbon has come down fairly dramatically. They're just about on target for their 2027 numbers. Massachusetts has more of a gap particularly as you have the retirements of Pilgrim which is coming up in 2019. So they have a lot more work to do, which is one of the reasons why the governor has sponsored the April RFP for large hydro and renewable, and of course is the June RFP for potentially up to 1,600 megawatts of offshore wind. So he and they understand this, and they're moving along rapidly to try to resolve this. And when you look at the other states, Maine's goal is so low to begin with. It's like about 8% there. They're pretty much there. New Hampshire is very close to theirs in Rhode Island (01

[Travis Miller:]

Okay. Great. I appreciate it.

[Leon J. Olivier:]

Yeah.

[Travis Miller:]

Thanks, Travis. I appreciate it. Next question is from Praful Mehta from Citi. Good morning, Praful.

[Praful Mehta:]

Good morning. Hi, guys. So quick question on the tax reform part, and wanted to understand from an offshore wind perspective, do the economics of offshore wind gets impacted by the tax reform, and how are you looking at other potential non-regulated investments in the renewables side and implications of that with the tax reform?

[Phil Lembo:]

No. We don't expect that at this stage, Praful. No impact.

[Praful Mehta:]

Got you. And just so I understand, why is that, because wouldn't that be a part of the economics of how you're looking at the project?

[Phil Lembo:]

Well, it depends on what it is that you're – what comes out of the outcome there.

[Leon J. Olivier:]

Yeah. And we have included in our analysis, Praful, no ITC or production tax credits associated with the project. And just based on the high capacity factors, the fairly significant and continuous drop in cost, we think it will be very competitive. And as I said earlier, the beauty of this (01

[James J. Judge:]

Hey, Praful, whether it's a solo investment that we have underway or the offshore wind investments at Bay State Wind or the Northern Pass line or we've actually announced electric vehicle infrastructure and battery storage pilots here in Massachusetts, I guess all of them would benefit from a lower tax rate, and that the effect of cost-to-capital initiatives (01

[Praful Mehta:]

Got you. But from a project perspective, the IRRs of – again, the non-regulated side, IRRs like the offshore wind, you don't expect much impact given you're not really incorporating the tax benefits. Is that a fair way to think of it?

[James J. Judge:]

That's right. Yes.

[Leon J. Olivier:]

That's right.

[Praful Mehta:]

All right. And then, on the Access Northeast, we understood and get all the – the Q&A has been helpful, but just to understand, if it doesn't go through, and if you do reach the point where from a go/no-go perspective reach the no-go, what you have in terms of other backup plans, in terms of CapEx spend, or what else do you think would be kind of helping support the growth story if Access Northeast weren't to play out?

[James J. Judge:]

We update our forecast every year, and I think it's still indicated between 2017 to 2019, we have increased our CapEx by $1 billion compared to where we were just a year ago. So as we go forward in time, more opportunities will appear for us. We don't anticipate Access Northeast being cancelled, but each year we seem to have more insight into capital needs of the system. And my expectation is that there'll be further projects for us to pursue.

[Praful Mehta:]

Got you. Thank you guys (01

[James J. Judge:]

All right.

[Travis Miller:]

Thanks, Praful. Next question is from Paul Patterson from Glenrock. Good morning, Paul.

[Paul Patterson:]

Good morning. How are you?

[James J. Judge:]

All right. How are you?

[Paul Patterson:]

All right. So I apologize if I missed this, but the border adjustment tax, how would that Northern Pass, with a proposal for border adjustment tax if you follow me (01

[Phil Lembo:]

Yeah. I think, some of the things that we've seen or I've seen, energy is not – it could be something, our energy and infrastructure is something that would not be impacted by that. If you're looking at materials and procurement and things like that, most of our – the highest preponderance, or the majority of the materials that we purchase are domestic materials. So from that standpoint, Paul, not much.

[Paul Patterson:]

Okay. Just so I (01

[Phil Lembo:]

Yeah. I think, that is a proposal. That has been discussed as that not being applicable to that, correct.

[Paul Patterson:]

Okay. And then, do we have a firm position from ISO New England whether or not Northern Pass would be (01

[Leon J. Olivier:]

That's still in discussion right now. So there is no firm decision, and there won't be one until Hydro-Quebec would basically provide their indication that they will bid into the full (01

[Paul Patterson:]

And so when will we get an idea, when will that be, I guess? When would that ( 01

[Leon J. Olivier:]

Well, that would be, obviously for the next function (01

[Paul Patterson:]

Okay. And that will FCA12, we would get an idea. You expect that Hydro-Quebec would want to participate in FCA12 as things stand.

[Leon J. Olivier:]

I wouldn't speculate what they would want to do on that. I wouldn't speculate for them.

[Paul Patterson:]

Okay. And then, in New Hampshire, you guys have $128 million (01

[Leon J. Olivier:]

No, Massachusetts, Paul, we don't have legislation at this point in time. This is kind of a period of education influencing and anticipating the ISO New England study as well.

[Paul Patterson:]

Okay. And then, just finally, there was an article, a couple of articles in the local press about one out of four, about 25% of Connecticut customers being behind in their bills, electric bills. And I was wondering, is there any weather issue or fuel, or is there something unusual about that? Is that a normal number? And just, in general, how should we think about what the implications of something like that are?

[Phil Lembo:]

Yeah. I'm not familiar with the specific article. But we certainly have a lot of focus on our credit strategies we've implemented to the extent allowed under the regulatory mechanisms recovery and reporting mechanisms to collect. So there's nothing kind of unusual in Connecticut. I think, it's a matter of sometimes folks get behind in their bills, whether it be for a number of reasons. But there's nothing in particular that's going on there, Paul.

[Paul Patterson:]

Okay. Thank you very much.

[Travis Miller:]

Thanks, Paul. Next question is from Michael Lapides from Goldman. Good morning, Michael.

[Michael Lapides:]

Good morning, guys. Question, and this one's probably for Lee and apologize for making you use your voice today. [Technical Difficulty] (01

[Leon J. Olivier:]

Yeah. Just to say, I wouldn't speculate at this point on the U.S. numbers because I'm sure you've looked up the European numbers, and they're all in now below $0.10 per kilowatt hour, and that's well known information of the most recent solicitations that have been done in Europe, off of Germany and Netherlands and so forth. And that includes the transmission as well and there's a few out there without transmission (01

[Michael Lapides:]

Got it. And when you think about the balance of needing more gas, but having offshore wind that runs heavily in the first and fourth quarter. Then the addition of a significant amount of offshore wind in New England kind of partially or significantly offset the need for incremental natural gas during winter peak.

[Leon J. Olivier:]

Yeah. I think from where we are now in terms of the shortfall of gas, and when you factor in another whatever 6,000 or 7,000 megawatts of retirements of the older units, you got to have gas. And if you talk to ISO New England, whether it's good, they always try the same thing. On a winter's day, 04

[Michael Lapides:]

Got it. Thank you, Lee. Much appreciate it.

[Jeffrey R. Kotkin:]

All right. Thank you, Michael. I know we've kept you guys for a while today. We really appreciate your time. If you got any follow-up questions, please give us a call. It looks like maybe we've already moved on to the next earnings call. So we will talk to you soon. Thank you and have a good day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.