Grid Modernization And Offshore Wind Will Advance Decarbonization Efforts

Key Takeaways

• Strategic investments in grid modernization and clean energy projects position Eversource for regulated revenue growth, benefiting from governments’ decarbonization and electrification mandates.
  
• Efficient capital allocation and constructive regulatory frameworks enhance margins, strengthen its financial position, and support reinvestment for sustained earnings growth.
  
• Rising distributed generation, high capital needs, decarbonization pressures, project execution risks, and weak demand growth threaten long-term profitability and rate base expansion.

Catalysts

A public utility holding company, engages in the energy delivery business.

• Eversource is positioned to benefit from multi-decade investment in grid modernization and infrastructure resilience, as it partners with states like Massachusetts on ambitious decarbonization and electrification goals. These government-mandated upgrades drive a projected 8% rate base growth over five years, setting the stage for a sustained increase in regulated revenue and long-term earnings growth.
  
• Major capital deployment opportunities tied to the rising adoption of electric vehicles and electrification of heating—specifically through projects such as Advanced Metering Infrastructure and expanded distribution in Massachusetts—expand Eversource’s addressable market and should materially increase future revenue and ultimately net income.
  
• Eversource’s strategic leadership in offshore wind and its partnerships on large-scale clean energy projects, such as Revolution Wind and activities tied to ISO New England’s 2050 transmission study, offer high-visibility avenues for regulated rate base expansion and new revenue streams, underpinned by secular growth in renewables.
  
• The company’s constructive regulatory relationships and robust presence in states prioritizing energy transition provide a clear path for timely rate recovery mechanisms, including performance-based ratemaking and inflation adjustments, which protect and enhance net margins even in inflationary environments.
  
• Ongoing cash flow improvements and efficient capital recycling—especially through divestiture of non-core assets like Aquarion Water and accelerated recovery of under-recovered regulatory costs—are strengthening the balance sheet and lowering financing costs, enabling reinvestment in high-return infrastructure and supporting higher future earnings per share.

Eversource Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Eversource Energy compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Eversource Energy's revenue will grow by 10.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.6% today to 13.0% in 3 years time.
• The bullish analysts expect earnings to reach $2.2 billion (and earnings per share of $5.83) by about July 2028, up from $840.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, down from 29.1x today. This future PE is lower than the current PE for the US Electric Utilities industry at 22.0x.
• Analysts expect the number of shares outstanding to grow by 2.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Eversource Energy Future Earnings Per Share Growth

Risks

• The increasing adoption of distributed energy resources and rooftop solar could reduce traditional electricity demand, putting pressure on long-term revenues as more customers generate their own power and rely less on Eversource’s grid.
  
• Persistent high capital expenditure requirements for grid modernization, AMI deployment, offshore wind, and environmental remediation may stretch free cash flow, potentially forcing future equity issuances that would dilute earnings per share growth.
  
• Political and consumer demands for decarbonization, alongside regulatory changes like lowering gas infrastructure investment caps and encouraging non-pipe alternatives, could increase compliance costs and pressure net margins if Eversource cannot swiftly transition assets.
  
• Recent cost overruns, delays, and regulatory uncertainty surrounding large clean energy and gas projects, especially in states like Connecticut and Massachusetts, may lead to denied rate recovery or asset impairments, directly impacting net income and return on equity.
  
• Slower-than-expected electrification of heating and transportation, combined with macroeconomic headwinds in the Northeast, could hinder electricity demand growth and reduce Eversource’s ability to expand its rate base, limiting future revenue and earnings potential.

Valuation

• The assumed bullish price target for Eversource Energy is $85.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Eversource Energy's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $47.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $16.9 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 6.7%.
• Given the current share price of $66.61, the bullish analyst price target of $85.0 is 21.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.