Morningstar | Yankee Gas Settlement Another Positive Regulatory Outcome for Eversource
We are reaffirming our $53 fair value estimate and no-moat and stable moat trend ratings for Eversource Energy after the company announced a settlement that will result in $30 million of rate increases during the next three years at subsidiary Yankee Gas. This is in line with our assumptions. We expect regulators to approve the settlement with no material changes.Eversource is on a regulatory roll. Even though Connecticut-based Yankee Gas is small, the decision carries more weight as emblematic of improving regulatory relationships. The constructive Yankee Gas settlement follows constructive rate case outcomes at Connecticut Light & Power and its Massachusetts electric utilities within the last year. These reverse many years of contentious and less constructive regulatory outcomes that had depressed Eversource's earned returns on equity.
This Yankee Gas decision also firms the pathway toward our 6% annual earnings and dividend growth rate through 2021, in line with management's 5%-7% target. Constructive state regulatory outcomes support Eversource's shift toward distribution-level investment growth to offset slower growth at its transmission business.
The introduction of rate decoupling also is a positive, albeit expected, change for Yankee Gas. Nearly all of Eversource's revenue now is decoupled from usage. This eliminates weather-related cash flow volatility and protects Eversource from a long-term slowdown in customer energy use. We think decoupling is a positive for shareholders as it tends to result in more predictable and stable cash flows, supporting a strong dividend.
The 9.3% settled allowed return on equity at Yankee Gas is lower than the national average for U.S. utilities but in line with CL&P and comes with a sharing mechanism that allows for earnings upside. We think this is a positive. In addition, forward-looking rates minimize regulatory lag and give Eversource a better chance to earn its allowed returns.
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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