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Eversource’s Rate Base Will Mostly Consist of Transmission Assets

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Eversource Energy: Earnings

Eversource Energy’s (ES) average earnings growth in the last five years was slightly over 5%. It projects that its earnings will expand by 5%–7% in the next five years.

During ES’s 4Q15 earnings results, its management lowered its earnings guidance by 100 basis points to 5%–7% after considering the “extension of bonus income tax depreciation through 2019.”

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Earnings drivers

ES’s transmission segment accounted for 34% of its 2015 earnings. The company’s management expects to increase the segment’s contribution to 50% through 2018. As we discussed earlier, transmission usually has higher approved return on equity (or ROE) than power distribution (RYU).

Eversource Energy’s consolidated ROE has stayed below the peer average of about 10%. However, higher possible ROE may improve the company’s earnings in the near future. With its aggressive investment on transmission, Eversource’s rate base portfolio may be getting better than it was few years back. ES’s long-term growth depends upon regulatory approvals and federal policies.

Growth in the natural gas segment

The gas distribution segment accounts for nearly 20% of ES’s total earnings. The company’s management expects its customer base in the gas segment to increase due to its infrastructure growth in the domain. Operations and maintenance expenses are also expected to fall, which may positively impact Eversource’s bottom line.

NSTAR Gas & Electric’s rate cases are also expected to contribute positively to Eversource’s total earnings. Eversource bought NSTAR Gas & Electric in 2012.

Investors can get passive exposure to US utilities by investing in the iShares US Utilities ETF (IDU). IDU invests 2.5% of its holdings in Eversource Energy. IDU’s top holdings include Duke Energy (DUK), NextEra Energy (NEE), and Southern Company (SO), which collectively make up ~21% of its portfolio.

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