INVESTMENT THESIS
We also like Eversource’s consistent record of dividend growth. The yield is about 2.6%, which may be attractive to income-oriented investors. The company has also exited its non regulated business, which we view as a strong positive, and is keeping O&M expenses in check.
RECENT DEVELOPMENTS
On November 3, Eversource reported 3Q20 earnings of $346.3 million. Excluding that charge, the company earned $863.
Eversource’s electric distribution segment earned $205.5 million in 3Q20 and $450.6 million, in the first nine months of 2020. This compared to $197.3 million in 3Q19 and $422.7 million, in the first nine months of 2019. The 3Q and year-to-date results reflected higher revenues, offset in part by higher O&M and depreciation and interest expense.
EARNINGS AND GROWTH ANALYSIS
Eversource reaffirmed its 2020 EPS guidance of $3.60-$3.70.
Our 2020 ES estimate is $3.64 and our 2021 estimate is $3.90. We expect continued strong kilowatt-hour sales growth over the remainder of 2020 and in 2021.
In our view, the company has several strong positives. (1) We expect continued cost synergies from the merger of Eversource (formerly Northeast Utilities) and NSTAR, and from the acquisition of Aquarion Water in late 2017. (2) We look for investments in the Transmission segment to add to the regulated rate base, which should in turn lead to higher returns on equity. (3) The company is benefiting from a favorable regulatory environment and improved earnings transparency.
We expect Eversource to post annual kilowatt-hour sales growth of 0.7%-0.8% in both 2020 and 2021, near the projected peer average of 0.6%-0.7%. We also look for annual natural gas demand growth of at least 1.2%-1.3% over the next three to four years. We remain optimistic that Eversource will continue to grow earnings and cash flow by expanding its Transmission rate base and leveraging its acquisition of Aquarion Water Co.
Our earnings model assumes normal weather conditions and positive relations with state and federal regulators. In our view, the company continues to demonstrate financial discipline and is strengthening its cost controls. Eversource also benefits from an efficient generating plant, up-to-date gas distribution facilities, and strong management execution.
FINANCIAL STRENGTH & DIVIDEND
We believe the company’s strong financial position will enable it to absorb any fluctuations in earnings and cash flow and maintain the common dividend. The company’s debt ratings are investment grade, and we expect ES to generate sufficient cash flow to cover 65%-70% of planned construction and improvement expenditures over the next three years. The company is rated Baa1/stable by Moody’s, A+/negative by S&P, and BBB+/stable by Fitch.
In 3Q20, the operating cash flow to capital expenditure ratio was 0.88, compared to 0.76 in 3Q19. Net operating cash flow was $1.49 billion.
The current dividend payout is an annualized $2.27 per share.
MANAGEMENT & RISKS
While system upgrades will pressure finances to some extent, we believe that regulators will provide sufficient rate increases to pay for the upgrades and new construction.
COMPANY DESCRIPTION
Eversource Energy, formerly Northeast Utilities, is a regulated electric and gas utility based in Connecticut and Massachusetts. The company’s system is the largest utility in New England, and with NSTAR and Aquarion Water Co. now in the fold, serves approximately 3.1 million electric; Public Service Co. of New Hampshire, which serves three-quarters of New Hampshire; NSTAR Electric, which serves eastern Massachusetts; NSTAR Gas, which serves customers in Boston and eastern Massachusetts; and Aquarian Water Co.
VALUATION
The company’s attractive integrated structure as well as growth in the Transmission segment also support our BUY rating. Added benefits are the company’s strong operating efficiencies, visible earnings stream, up-to-date gas distribution facilities, well-run electric generating units, and experienced management team. The company also continues to add new customers, despite some economic weakness in its service areas, and remains focused on keeping O&M expenses in check.
On December 14 at midday, BUY-rated ES traded at $86.44, up $0.65.
Source: Argus
