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Eversource Energy: Solid Results Show Growth, Positioned For Reasonable Return

Article Republished By Javier Troconis

steverts/iStock via Getty Images

On Monday, May 4, 2022, New England-based electric and natural gas utility Eversource Energy (NYSE:ES) announced its first-quarter 2022 earnings results. Admittedly, the earnings reports of utility companies are rarely the topic of much market or media attention, but this one was different because of the suggestion that Eversource Energy may be considering a sale of its offshore wind portfolio. This is very surprising, considering that Eversource Energy has been very dedicated to this aspect of the business over the past few years, but a sale may still make sense in the correct circumstances.

There were certainly other reasons to like this earnings report too as Eversource Energy posted very solid year-over-year revenue growth and an earnings beat, which may have been another reason why the stock surged following the earnings report. Overall, Eversource Energy continues to look like a very solid holding in the utility sector and a decent way to generate a 2.82% yield.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Eversource Energy’s first-quarter 2022 earnings report:

  • Eversource Energy brought in total revenues of $3.471310 billion in the first quarter of 2022. This represents a 22.84% increase over the $2.825840 billion that the company reported in the prior-year quarter.
  • The company reported an operating income of $663.055 million during the reporting period. This represents a significant 13.23% increase over the $585.568 million that the company reported in the year-ago quarter.
  • Eversource Energy began a strategic review of its offshore wind joint venture with Ørsted (OTCPK:DNNGY). This could result in a potential sale, although no decision has been made at this time.
  • The company reported an operating cash flow of $371.9 million during the current quarter. This represents a 9.60% decline over the $411.4 million that the company reported in the equivalent quarter of last year.
  • Eversource Energy reported a net income of $445.326 million during the first quarter of 2022. This represents a 21.00% increase over the $368.023 million that the firm reported in the first quarter of 2021.

The first thing that anyone reading this will undoubtedly notice is that Eversource Energy’s revenues and net income increased substantially year-over-year. This is not unusual for this company. In fact, Eversource Energy has grown its earnings per share at a 6% compound annual growth rate over the past eight years, a trend that the company expects to continue in the future:

ES EPS Growth Rate

Eversource Energy

The company’s management did not provide any reason for this during the earnings release, but it seems likely that this was caused by Eversource Energy growing its rate base over the past year. The rate base is the value of the company’s assets upon which it is allowed to earn a specified rate of return. Thus, as the rate base increases, Eversource Energy can adjust the prices that it charges its customers in order to earn that rate of return.

As we have discussed in previous articles on Eversource Energy, the company has been investing heavily into upgrading, modernizing, and expanding its utility infrastructure in order to increase its value and thus grow the rate base. In fact, the company invested a sizable $3.541 billion into this task in 2021.

The company did not state exactly how much this increased its rate base (it will be less than the amount spent due to depreciation and asset retirements), but we can certainly conclude that it is much higher. As the rate of return that the company can earn is a percentage, any increase in value would increase the amount of money that it can bring in from its customers and that ultimately allows more money to make its way down to the firm’s bottom line.

Eversource Energy plans to continue to make investments into its infrastructure in order to continue this growth trajectory going forward. During the earnings call, Eversource Energy unveiled its five-year capital spending program. In short, Eversource Energy intends to invest $18.1 billion over the 2022 to 2026 period:

Eversource Energy Capital Spending Plan

Eversource Energy

We can see that the company’s distribution network receives the greatest individual amount of spending. This is not particularly surprising. The distribution network is the aspect of the electric utility grid that brings the power to each individual home and business so it overall covers the widest area and has the most points of failure. As such, it is the most expensive individual aspect to maintain. As investors though, we are most interested in the growth that will result from these capital investments. Eversource Energy has guided earnings per share to grow at a 5% to 7% rate over the period. When we combine this with the company’s 2.82% yield, the stock should be able to deliver a total return of 8% to 10% over the five-year period, which is reasonable for a utility.

In various past articles on Eversource Energy, we discussed how the company has been one of the more aggressive utilities with respect to the development and deployment of renewable power. In particular, Eversource Energy is currently involved in a joint venture with Denmark’s Ørsted to construct wind farms off the coasts of New England and New York. This actually makes a certain amount of sense, as offshore wind power has a number of advantages over other forms of renewable power (as I recently discussed here) and the area in which the company operates has a great deal of coastline. The joint venture currently owns three offshore wind farms with a generation capacity of 1,758 megawatts at various stages of development. The joint venture also holds leases for 175,000 acres that could be used for more offshore wind farms.

When we consider the zeal with which the company has been promoting this joint venture at various analyst and investor conferences over the years, it came as somewhat of a shock when Eversource Energy divulged in the earnings press release that it is considering selling its stake in the joint venture. More specifically, Joe Nolan, Eversource Energy’s president and CEO, stated:

In light of the record-setting prices in the recent federal lease auction for tracts around the New York Bight and an evolving landscape, we are conducting a fulsome review of our interest in the joint venture with Ørsted to assess alternatives that will allow us to create shareholder value and continue building a leading clean energy company that is wholly committed to supporting offshore wind with advocacy, transmission investment solutions, and clean energy resource integration.

Mr. Nolan went on to state that it is conducting a review of what to do with the company’s stake in the joint venture and that said solution may include a total or partial sale.

This statement appears to suggest that Mr. Nolan believes that the leases and other assets held by the joint venture are overvalued and that better returns would be found elsewhere. If that is correct, then a sale would certainly be to the benefit of the shareholders, and it makes sense why Eversource Energy’s stock price jumped on this news.

Admittedly, it may not be a particularly good sign for the other companies that have been buying up leases in the area to develop offshore wind farms, but as investors in Eversource Energy, that is not really our problem. The company expects to have the review completed by the end of the year, so we should know in a few months how Eversource Energy will proceed and can make further decisions based on that move at that time.

One reason why investors purchase shares of utility companies like Eversource Energy is because of the relatively high dividend yields that they tend to possess. Indeed, Eversource Energy currently boasts a 2.82% yield, which is certainly higher than the 1.46% yield of the S&P 500 index (SPY). Perhaps even better, Eversource Energy has a long history of steadily growing its dividend over time:

ES Dividend History

Seeking Alpha

A steadily growing dividend is particularly attractive in times of high inflation, such as what we are seeing today in the United States. This is because inflation is steadily decreasing the number of goods and services that we can purchase with the dividend. Thus, the fact that the company is giving us more and more money with each passing year helps to offset this effect. This is very nice for people such as retirees that are dependent on their portfolios for income. As is always the case, though, it is critical that we ensure that the company can actually afford the dividend that it pays out. After all, we do not want it to be forced to reverse course and cut the dividend, since that would reduce our incomes and most likely cause the stock price to decline.

The usual way that we judge a company’s ability to pay its dividend is by looking at its free cash flow. Free cash flow is the amount of cash that is generated by the company’s ordinary operations and is left over after it pays all its bills and makes all necessary capital expenditures. This is, therefore, the money that can be used for things such as paying off debt, buying back stock, or issuing a dividend. In the first quarter of 2022, Eversource Energy reported a negative levered free cash flow of $129.1 million. This is clearly not enough to pay any dividend, but Eversource Energy still paid out $213.9 million in the period.

With that said, it is not unusual for a utility like Eversource Energy to pay its dividend out of its operating cash flow and finance its capital expenditures through the issuance of equity and especially debt. This is mostly due to the extremely high costs of constructing and maintaining utility-grade infrastructure. During the first quarter of 2022, Eversource Energy reported an operating cash flow of $371.9 million, which is more than enough to cover the $213.9 million in dividends, with money left over for other purposes. Overall, this dividend appears to be secure and investors probably do not have anything to worry about.

In conclusion, Eversource Energy reported the respectable growth that we have come to expect from this company. Fortunately for us, it is unlikely that this growth will stop in the near future. Indeed, the company’s stock is positioned to give investors a very respectable return over the next few years. The fact that the company might be selling its stake in its offshore wind joint venture is somewhat surprising, but it may be in the best interest of stockholders if the current lease holdings are overvalued. The stock also boasts a respectable dividend yield that appears to be secure. Overall, this continues to look like a good utility play.

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