Sell the stocks of Eversource Energy (NYSE: ES)

Summary: 

Eversource Energy is downgraded to Sell as its earnings per share failed to surpass the Zacks Consensus Estimate in the last two quarters. In addition to its dependence on its subsidiaries, stringent environmental regulations, weather variation in its service territories and risks due to modifications in state and local legislative requirements are bottlenecks that could adversely impact results. Eversource Energy’s systematic investments in infrastructure development projects, primarily in transmission and distribution systems, will help it to provide reliable services to its customers. If the company can reduce its operating costs like it did in the reported quarter, margins are bound to get a boost.

Reasons To Sell:

• Eversource Energy as a holding company does not have any revenue generation capacity of its own. The company's liquidity is dependent on dividends derived from its subsidiaries, its commercial paper program, and its ability to access the long-term debt and equity capital markets. If the subsidiaries fail to perform as per expectations, Eversource parent’s ability to repay debt, interest and distribute dividend could get hampered. 
•  Eversource Energy’s operations are subject to federal, state and local legislative requirements, as well as extensive environmental regulations, relating to emission of greenhouse gases and carbon dioxide, air and water pollution, and waste management. Any modification in existing regulations and introduction of new mandates could impact the financial performance of the company.
• Apart from using its own funds, Eversource Energy utilizes several external sources, including debts and capital markets, to finance its projects and ongoing operations. Inability to access any of these resources might disrupt its business. In addition, an increase in interest rates will increase its operating costs.
•  Eversource Energy also faces challenges due to severe weather conditions (in the first quarter the mild winter weather lowered demand for natural gas and electricity) and natural calamities like hurricanes and snowstorms, causing breakdown and damage of transmission and distribution lines, and disrupting normal operations. Cost of repairing the damages could exceed its estimated expenses and insurance coverage. Failure to recover excess costs from customers could have an adverse impact on Eversource Energy’s financial position. 

Risks: 

• Eversource Energy pursues organic growth to expand its operations. It is currently focused on upgrading its distribution and utility transmission infrastructure. The company’s capital expenditure totaled $1.9 billion in 2015, of which $807 million was invested in Electric Transmission and $1,029 million in Distribution and Generation. Eversource Energy has plans to invest $9.2 billion in the 2016 to 2019 time period. Of this total budget, Eversource aims to invest nearly $4.9 billion to strengthen its distribution and generation operations. These regulated investments will help the company to increase its earnings per share by 5% to 7% over the 2016 to 2019 time frame from 2015 base earnings of $2.81 per share. Eversource aims to invest nearly $3.9 billion over 2016 to 2019 to strengthen its electric transmission operations. The company expects to invest $911 million in transmission projects in 2016. Its reliability projects, the Greater Boston Reliability Solutions and the Greater Hartford/Central Connecticut Solutions, are progressing as per plan. The company has already invested $130 million in these two projects and expects to invest another $900 million by 2019. 
•  Transmission and distribution projects are capital intensive, and keeping this in mind the company has joined forces with other parties to develop two projects to further enhance the quality of services. A transmission project called the Clean Energy Connect will be jointly developed with other utility players. This project involves construction of the new 600 megawatt, 25 mile transmission line between a transmission substation owned by Eversource in Hinsdale, MA and a transmission substation in Easton, NY. This project will utilize back-to-back HVDC converters to ensure deliverability into New England. The company is also pursuing the Access Northeast natural gas pipeline and storage project, which will enable it to keep 5,000 megawatts of efficient natural gas generation online even at the lowest temperatures. Eversource has a 40% stake in Access Northeast while another 40% is held by Spectra and the remaining 20% by National Grid. Access Northeast is a crucial project at a time when the region is battling major infrastructure issues that are responsible for higher energy costs during winter and grid reliability concerns. This project would also allow Eversource Energy to meet its carbon emission reduction targets.
• Eversource Energy’s focus on renewable energy generation would help the company to meet renewable energy mandates by state governments and enjoy incentives offered by state and federal programs. Presently, the company owns and operates a fleet of renewable generation sources that includes nine hydroelectric power plants throughout New Hampshire along with the Northern Wood Power biomass, Silver Lake Solar, Indian Orchard Solar and Cottage Street Solar facilities. 
•  Eversource Energy has been able to manage its expenditure in an efficient manner. The company achieved an overall average O&M expense reduction of 5% in the last three years, exceeding its cost reduction goal of 2% to 3% in a year. These continuous cost reduction initiatives will boost its margins.