New England utility Eversource Energy told investors that the company is unfazed about its long-term future after S&P Global Ratings downgraded its issuer credit rating over its offshore wind projects. Eversource's second-quarter earnings also sustained a hefty impairment charge over a blocked transmission project.
On an Aug. 1 investors call, Eversource CFO Philip Lembo said the company disagrees with S&P Global Ratings' decision to lower the company's issuer credit rating by two notches from A+ to A- over its continued pursuit of offshore wind projects. The rating agency also downgraded Eversource's senior unsecured rating to BBB+ from A and its commercial paper program to A-2 from A-1.
In its decision, S&P Global Ratings said it views contracted offshore wind as "having considerably higher risks" than the rest of Eversource's low-risk transmission and distribution portfolio. The ratings outlook is stable but a further downgrade is possible over the next 12 to 24 months if Eversource's growth strategy suggests an acceleration of offshore wind development activities beyond the agency's base-case expectation, the rating agency warned.
S&P Global Ratings should not have lowered Eversource's rating as the company offers a "robust financial profile, industry-leading cost management, strong operating history [in a] positive regulatory environment which includes multiple multiyear settlements and a diverse regulatory jurisdiction exposure," Lembo said. This combination of financial strengths "should have allowed us to preserve our previous ratings or at least limited any downgrades."
"Nonetheless, there are no electric utility-holding company peers with higher ratings than Eversource at S&P, and we expect to continue to be able to finance at variable levels that will continue to benefit our customers," Lembo said. Going forward, he said the ratings downgrade will have no real effect on Eversource's EPS guidance range of 5% to 7% through 2023.
Eversource is pursuing at least three offshore wind projects with Denmark's Ørsted A/S as its partner: the 130-MW South Fork and 704-MW Revolution Wind projects off Massachusetts and the 880-MW Sunrise Wind Offshore Farm off Long Island, N.Y.
South Fork, which has an agreement to deliver 130 MW to the Long Island Power Authority, is set to begin construction in 2021 and start commercial operations by the end of 2022. Revolution Wind is set to start construction in 2021 and become operational in 2023. The output is all contracted, with 600 MW to Rhode Island and Connecticut, with the remaining 104 MW waiting on an expected approval of a power purchase agreement from Connecticut regulators sometime this year, Lembo said.
The Sunrise Wind project, which was recently selected as the winning offer in a solicitation by the New York State Research and Development Authority, is slated to start construction in 2022, in time to become operational in 2024.
According to Eversource, the construction operation plan for South Fork has already been filed with the U.S. Department of the Interior's Bureau of Ocean Energy Management. Revolution Wind's construction operation plan will be filed in late 2019 or early 2020 with the Bureau of Ocean Energy Management, followed by the submission of Sunrise Wind's plan in 2020.
Impairment clips Q2 results
Eversource's second-quarter earnings also took a hit following the termination of the company's proposed Northern Pass transmission line through New Hampshire. Northern Pass was a planned 1,090-MW, high-voltage, direct-current transmission line to transmit Canadian hydropower generated by Hydro-Québec to Massachusetts. However, a July 19 ruling by New Hampshire's Supreme Court affirmed the state's denial of a siting permit for the $1.6 billion, 192-mile-long project.
Accepting the court decision, Eversource took a $204.4 million after-tax impairment charge over Northern Pass, which shaved 64 cents off its second-quarter earnings to 10 cents per share. Excluding the Northern Pass charge, Eversource recorded earnings of 74 cents per share, compared to 76 cents per share in the corresponding quarter of 2018.
Excluding the Northern Pass charge, Eversource's transmission earnings totaled 37 cents per share in the second quarter, compared to 35 cents in the same period of 2018. Lembo said this improvement was due to the increased level of transmission facilities in the company's rate base. In the first half, transmission capital expenditures at Eversource's three electric utilities totaled $447 million. Eversource forecast that its core utility transmission investments will be nearly $1 billion for the full year, Lembo added.
Eversource's electric distribution segment earned 33 cents per share in the second quarter, up by a penny from the same period the year before. Previously approved rate increases at subsidiaries Connecticut Light and Power Co. and NSTAR Electric Co. were mostly offset by higher operations and maintenance and depreciation expense, Lembo said. In addition, second-quarter results were down by about 1 cent per share due to the divestiture of New Hampshire generating facilities.
In New Hampshire, Eversource filed with state regulators in May a permanent base distribution rate increase of $70 million, slated to take effect in 2020, that incorporates an already-approved temporary rate increase of $28.3 million taking effect Aug. 1.
Among other company developments, Lembo said Eversource is on pace to complete its $45 million capital program in Massachusetts to deploy over 3,500 electric vehicle charging ports by the end of 2020. Eversource is poised to propose a similar EV charging program in Connecticut, pending guidance from regulators on a broader review of credit line.
As a positive sign of Eversource's standing, Lembo noted that NSTAR Electric issued its first green bond in May, selling $400 million of senior unsecured notes with a coupon of 3.25%. "It was the tightest spread ever on an unsecured green bond in our industry and it attracted some new investors to Eversource and has a strong very sustainable investment profile," Lembo said.
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