Massachusetts Transmission And Distribution Investments Will Transform Regional Energy Landscape

Key Takeaways

• Strategic investments in transmission and distribution, along with AMI deployment, are set to enhance revenue, earnings, and operational efficiency.
  
• Successful divestitures and site acquisitions aim to strengthen financials and support long-term regional energy goals.
  
• Regulatory uncertainties, inflationary pressures, and supply chain challenges could impact capital costs, revenue growth, and financial stability through pricing and investment strategies.

Catalysts

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

• Eversource Energy anticipates a significant rate base growth of 8% over a five-year period, driven by transmission and distribution investments, particularly in Massachusetts to meet electrification goals. This is likely to positively impact revenue and earnings.
  
• The partnership with ISO New England for long-term transmission opportunities suggests future growth in transmission services, pointing to potential revenue increases.
  
• The acquisition of the Mystic site in Everett is expected to create a strategic interconnection hub, supporting regional energy goals and potentially boosting longer-term revenue and earnings through new project opportunities.
  
• The deployment of Advanced Metering Infrastructure (AMI) in Massachusetts aims to enhance customer energy management and operational efficiency, which might improve net margins by reducing costs and optimizing energy distribution.
  
• The successful divestiture of Aquarion Water and recovery of deferred storm costs are expected to enhance financials, strengthening the balance sheet and improving the FFO to debt ratio, potentially affecting future earnings positively.

Eversource Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eversource Energy's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 14.2% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $5.31) by about May 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 analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, down from 25.9x today. This future PE is lower than the current PE for the US Electric Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 4.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.43%, as per the Simply Wall St company report.

Eversource Energy Future Earnings Per Share Growth

Risks

• Regulatory uncertainties in Connecticut and Massachusetts, including potential changes in performance-based ratemaking and affordability measures, could impact future revenue recovery efforts and rate adjustments.
  
• Tariff and inflationary pressures could increase capital and operational costs, potentially affecting net margins and the company's ability to maintain its projected earnings growth rates.
  
• Ongoing legislative and regulatory actions, such as rate reductions or new rules on gas infrastructure spending, might constrain revenue growth or impact cost recovery, thereby affecting earnings.
  
• Supply chain challenges and potential future tariff issues, despite current mitigation efforts, pose risks of cost increases in capital investment projects, which could impact capital efficiency and net margins.
  
• The planned equity issuance towards the end of the forecast period and significant debt reduction strategies are contingent on asset sales and regulatory outcomes, potentially affecting credit metrics and financial flexibility.

Valuation

• The analysts have a consensus price target of $68.973 for Eversource Energy based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $14.3 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $59.21, the analyst price target of $68.97 is 14.2% 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.