Stock story: Eversource Energy

The utility’s reliable earnings, robust balance sheet and constructive ESG make for resilience.

Stock story: Eversource Energy

Eversource Energy is a diversified utility serving about 3.2 million electricity customers, 880,000 natural gas customers and 220,000 water customers in the US states of Massachusetts, Connecticut and New Hampshire.

With its reliable earnings, robust balance sheet, and constructive environmental, social and governance attributes, the company offers investors a bulwark of resilience in an uncertain market.

Eversource’s ability to consistently generate predictable and reliable earnings for its investors stems from two fundamental attributes. First, the services provided by the company – the delivery of electricity, natural gas and water – meet basic human needs, ensuring demand is predictable. Second, because the company’s network assets exhibit natural monopoly characteristics, Eversource is subject to economic regulation. This regulation prescribes how much the company is entitled to earn for the provision of its services – in many cases, over a multi-year horizon – allowing investors to forecast its earnings with a high degree of confidence.

In benefiting from predictable demand and the certainty of earnings provided by economic regulation, Eversource exhibits characteristics shared by many regulated utilities. Yet even among regulated utilities, the company is notable for the extraordinary resilience of its earnings. This uncommon durability is the product of the constructive regulatory regimes in which Eversource operates. Nearly 40% of the company’s operating earnings are derived from electricity transmission assets regulated by the US Federal Energy Regulatory Commission – a regime that is commonly regarded as the gold standard of utility regulation for its premium authorised equity returns and formula rates, which immunise network owners against fluctuations in volumes and ensure timely recovery of investments in the grid.  Eversource also benefits from investor-friendly provisions in its state-regulated distribution networks. Regulatory decisions in Massachusetts and Connecticut allow the company to implement annual tariff increases to offset the effects of inflation, while revenue decoupling provisions and reconciling mechanisms substantially eliminate volume and commodity price risk.

A robust balance sheet accentuates the resilience inherent in Eversource’s low-risk operating model. For 2019, the company’s earnings before interest, tax, depreciation and amortisation (a commonly used proxy for operating cash flows) covered the interest burden associated with its debt more than five times. Reflecting these prudent financial settings, Standard & Poor’s, a credit rating agency, assigns Eversource Energy an A- credit rating, among the highest ratings the agency awards to a US utility.

Eversource’s attractive risk profile is bolstered by constructive, environmental, social and governance attributes. Committed to leading the clean-energy transition, Eversource plans to achieve carbon neutrality by 2030; is facilitating the build-out of electric vehicle charging infrastructure in its region; and, in partnership with Danish company, Orsted, plans to develop up to four gigawatts of contracted offshore wind-generating capacity. Moreover, despite recent criticism of its Connecticut electricity distribution business, the company generally enjoys a robust social licence. The esteem in which Eversource is held by stakeholders reflects its track record of industry-leading service reliability, strict cost control, and class-leading energy-efficiency program – measures that have constrained customer bill growth to a level below general inflation for much of the last decade. Even in Connecticut, where the company has recently been criticised for substantial bill increases and prolonged outages caused by Tropical Storm Isaias, Eversource could reasonably claim to have been harshly judged. Objective consideration of the evidence reveals that more than 90% of the growth in bills that raised the ire of customers was an artefact of dramatic increases in consumption as consumers ran their air-conditioners continuously during a record heatwave. Moreover, the restoration of power in the aftermath of Tropical Storm Isaias met all regulatory performance commitments and was completed in a materially shorter time frame than similar prior incidents. Notwithstanding this controversy, Eversource expects to achieve acceptable regulatory outcomes in the state. The company’s risk profile is further moderated by solid governance standards, with management proving themselves to be adept stewards of capital.

Eversource Energy presents investors with attractive growth prospects. Management expects the company’s core regulated assets to support growth in earnings per share of 5% to 7% p.a. to 2024, underpinned by US$14.2 billion of investment in its network infrastructure. Yet history suggests management’s guidance is likely to prove conservative, with realised capital expenditure (which delivers increased earnings under the regulatory framework) exceeding initial guidance by 35% in 2018 and 66% in 2019. Earnings from the company’s recently completed acquisition of a natural-gas distribution franchise in Massachusetts and planned offshore wind projects are expected to boost growth even further, presenting a compelling proposition.

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