Morningstar | Management Meeting: Grid Upgrades, Offshore Wind Different Paths to Growth for Eversource
We are reaffirming our $56 per share fair value estimate after meeting with management at the American Gas Association Financial Forum. We are also reaffirming our no-moat and stable moat trend ratings.Grid modernization and offshore wind remain two major investment focuses for Eversource, each with much different implications for investors.
The Merrimack Valley gas explosion in the Boston area last year has accelerated the push to make safety investments and incorporate more automation on the gas system. Regulators and legislators are pushing similar grid modernization efforts on the electric system. Grid modernization on both the electric and gas distribution systems across its entire service territory have the chance to add $200 million-$300 million per year in new investment during the next few years.
We think these are good growth programs with regulatory and political support. These would be incremental to the $11 billion we expect Eversource to invest in 2019-22. Although the programs are small relative to Eversource’s investment plan, they give us more confidence that Eversource can hit our 6% annual earnings growth forecast.
The offshore wind initiatives in Massachusetts and New York would be much larger and could be a significant value driver, either positive or negative. Massachusetts is set to expand its offshore wind authorization by 2,000 megawatts, and we expect that Eversource in partnership with European utility Orsted will compete for the right to build some of that capacity. This could be a multibillion-dollar investment that could boost growth above management’s 5%-7% range, but it also introduces the risk of large cost overruns that would be a drag on earnings growth. We incorporate only a small capital commitment to offshore wind in our four-year forecasts.
Eversource Energy is a public utility holding company. Through its subsidiaries, the company has four segments: electric distribution, which is engaged in the distribution of electricity to retail customers in Connecticut, Massachusetts and New Hampshire; electric transmission, which owns and maintains transmission facilities that are part of an interstate power transmission grid over which electricity is transmitted throughout New England; natural gas distribution, which distributes natural gas to communities in Massachusetts and cities and towns in Connecticut; and water distribution, which provides water services in towns and cities in Connecticut, Massachusetts and New Hampshire.
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