Company Overview: Eversource Energy (NYSE: ES) is a utility holding company that is primarily engaged in the energy delivery business via a set of seven wholly-owned utility subsidiaries. Reporting segments of ES (with earnings contribution) includes electric distribution (45% of FY20 earnings), electric transmission (41% of FY20 earnings), natural gas distribution (11% of FY20 earnings) and water distribution (3% of FY20 earnings).

ES Details

Material Business Updates:

Deal Struck to Charter Offshore Wind Turbine Installation Vessel: ES has inked an agreement with Dominion Energy and Ørsted to charter a US$500 million (472-foot) offshore wind turbine installation vessel for the construction of - Ørsted-Eversource’s Revolution Wind and Sunrise Wind.

Establishing a Component Manufacturing Facility: On 14^th April 2021, Ørsted and ES Joint Venture (JV) announced to plant a 228-foot foundation component facility to brace the fabrication and assembly of Northeast offshore wind farms.

Awaited Acquisition of New England Service Company: On 8^th April 2021, Aquarion Water Company inked a definitive agreement to acquire New England Service Company (NESC). The merger shall develop a customer base with circa 10,000 new customers.

Historical Financial Trend:

ES illustrated sustainable historical growth while keeping the value proposition intact. The Operating revenues have been growing since FY16 with consistent growth in net income. Operating revenues grew at a 3.9% CAGR (FY16 – FY20).

Figure 1: Historical Financial Overview:

Source: Company Reports, Analysis by Kalkine Group

First Quarter FY21 Performance:

• Top-line and Earnings Insights: ES registered US$2,825.84 million in operating revenues in Q1 FY21 relative to US$2,373.73 million in pcp. Net income inclined to US$366.14 million relative to US$334.75 million in Q1FY20, primarily driven by higher earnings from the electric transmission segment, natural gas distribution and water distribution.

• Decent funding and liquidity position as of 31 March 2021: Cash balance amounted to ~US$34.11 million. Long-term debt declined from ~US$15.13 billion as of 31 December 2020 to ~US$14.78 million.

Figure 2: Segment Earnings:

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

• Operating Revenues Inclined: Operating revenues inclined to US$8,904.43 million relative to US$8,546.47 million in FY19 and net income inclined to US$1,205.17 million relative to US$909.05 million in FY19.

• Insights on Cash Flow from Operations (CFO): CFO declined to US$1.68 billion in 2020 relative to US$2.01 billion. Delayed cash collections, temporary rate suspension at Connecticut Light & Power Company (CL&P) and $196 million paid against storm restoration costs caused an unfavourable impact on CFO.

Top 10 Shareholders:

The top 10 shareholders together form ~41.31% of the total shareholding. The Vanguard Group, Inc. and Magellan Asset Management Limited holds a maximum stake in the company at ~11.92% and ~7.72%, respectively.

Figure 3: Top 10 Shareholders:

Source: Analysis by Kalkine Group

Key Metrics:

Consistent growth in sales volume across electric and natural gas distribution has translated into long-term sustainable growth levels. In addition, the steady cost of power, fuel and transmission purchase and operations & maintenance expenses have streamlined operating margins, exhibiting a sustainable growth rate across years. As a result, ES’ profitability and return status remain stable despite recent market disruptions.

Figure 4: Key Financial Metrics:

Growth and Profitability Metrics (Source: Analysis by Kalkine Group)

Outlook:

• Diversified Exposure: ES explores diversification opportunities via South Fork Wind (130 MW), Revolution Wind (704 MW) and Sunshine Wind (880 MW).
• Guidance: EPS is estimated to clock at US$3.81 - US$3.93 in FY21 (7%-10% YoY growth). ES forecasts $17 billion capex spread across FY21 – FY25 with US$3.52 billion in FY21.
• Key Earning Drivers for FY21: Favourable distribution rate adjustments, capital investments in transmission distribution and capital recovery tracking programs.

Key Risks:

• Higher leverage may turn troublesome in light of uncertain market disruptions.
• Utility price volatility may significantly erode the top-line.
• Cash flow risks from customer credits delayed cash collection, and temporary rate suspension may prevail.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Stock Recommendation: ES has delivered 3-month and 6-month returns of ~-7.573% and ~-4.793%, respectively. The stock is trading below the average of the 52-week low price of $76.64 and the 52-week high price of $96.66, indicating an accumulation opportunity. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer average EV/EBITDA (NTM Trading multiple), considering its stable operating revenue, higher overall cash flow from operations relative to capex and sustainable shareholders’ return. For the relative valuation purpose, we have taken peers such as Idacorp Inc (NYSE: IDA), MGE Energy Inc (NASDAQ: MGEE), PPL Corp (NYSE: PPL), to name a few. Considering the diversification via offshore wind projects, sustainable top-line & cash flows, favourable drivers for earnings in FY21, the current trading levels, and valuation, we give a “Buy” recommendation on the stock at the closing price of $81.04, up by 0.42% as on 6 July 2021.

ES Daily Technical Chart (Source: REFINITIV)

Note: The purple color line in the chart shows RSI (14-period).

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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