8-K: Eversource Challenges FERC ROE Cut, Revises 2026 Guidance

Eversource Energy is taking legal action against a Federal Energy Regulatory Commission decision to reduce the return on equity for New England transmission owners, leading to a downward revision of its 2026 earnings guidance.

Summary

• The Federal Energy Regulatory Commission (FERC) arbitrarily reduced the Return on Equity (ROE) for New England transmission owners, utilizing outdated, decade-old data.
• Eversource Energy is pursuing legal action, including filing a motion for stay of the order and evaluating a Section 205 filing, to challenge the decision and prevent damaging retroactive refunds.
• The FERC order established a base ROE of 9.57% for New England transmission owners and a maximum ROE for transmission incentives of 12.09%.
• The FERC decision is expected to lower Eversource's future after-tax earnings by approximately $70 million for 2026.
• Eversource's revised 2026 non-GAAP earnings guidance is now expected to be in the range of $4.57 to $4.72 per share.
• The revised guidance includes a $15 million negative impact should the Aquarion sale, recently approved by PURA, close this year, recognizing that approximately 70% of Aquarion's earnings occur in the second half of the year.
• Potential retroactive refunds for prior periods, if upheld, would be issued over an 18 to 24-month period in coordination with other New England transmission owners and ISO New England, and with FERC's approval.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this as a negative development due to the significant financial impact of the FERC decision and the downward revision of earnings guidance, coupled with increased regulatory uncertainty and potential for higher borrowing costs.

Positives

• PURA recently approved the Aquarion sale, indicating progress on a strategic divestiture.
• Eversource expects annual earnings growth towards the upper half of its long-term guidance (5-7%) by 2028.

Negatives

• The FERC decision to reduce ROE is expected to lower Eversource's future after-tax earnings by approximately $70 million for 2026.
• The revised 2026 non-GAAP earnings guidance of $4.57 to $4.72 per share represents a downward adjustment from previous expectations.
• The potential Aquarion sale is expected to have a $15 million negative impact on 2026 earnings, primarily in the second half of the year.
• The FERC decision used outdated, decade-old data, which Eversource believes is inconsistent with the Federal Power Act.
• The decision risks eroding investor confidence, raising the cost of capital for vital infrastructure improvements, and risking cascading negative consequences for customers.
• If FERC's retroactive refund order is upheld, it would increase regulatory risk, raise borrowing costs due to the likelihood of credit downgrades, and make future transmission projects more expensive.

Risks

• Cyber events or breaches, including acts of war or terrorism, affecting systems or the systems of third parties.
• Unauthorized access to, and misappropriation of, confidential and proprietary Company, customer, employee, financial or system operating information.
• Actions or inaction of local, state, and federal regulatory, public policy, and taxing bodies.
• Changes in laws, regulations, Presidential executive orders, or regulatory policy, which may impact compliance costs and strategic initiatives.
• Adverse publicity harming reputation, influencing legislative and regulatory bodies, and resulting in unfavorable outcomes.
• Variability in the costs and final investment returns of the Revolution Wind and South Fork Wind offshore wind projects as it relates to the purchase price post-closing adjustment.
• Ability to qualify for investment tax credits.
• Extreme weather, including severe storms due to the impacts of climate change, and fluctuations in weather patterns.
• Adequacy, contamination of, or disruption in, water supplies.
• Physical attacks or grid disturbances that may damage and disrupt electric transmission and electric, natural gas, and water distribution systems.
• Ability or inability to commence and complete major strategic development projects and opportunities.
• Breakdown, failure of, or damage to operating equipment, information technology systems, or processes of transmission and distribution systems.
• Changes in levels or timing of capital expenditures, including unplanned expenditures and increased capital expenditure requirements.
• Changes in business conditions, which could include disruptive technology or development of alternative energy sources.
• Substandard performance of third-party suppliers and service providers, or counterparties not meeting their obligations.
• Limits on access to, or increases in, the cost of capital, including disruptions in the capital markets.
• Changes in economic conditions, including impact on interest rates, tax policies, tariffs, and customer demand and payment ability.
• Changes in accounting standards and financial reporting regulations.
• Actions of rating agencies.
• Other presently unknown or unforeseen factors.

Future Outlook

Eversource expects its cumulative long-term earnings per share growth rate to be within the range of 5 to 7 percent through 2030, using the adjusted 2026 non-GAAP earnings guidance mid-point of $4.65 per share as the base year. The company anticipates annual earnings growth towards the upper half of its long-term guidance by 2028.

Management Comments

• The recent decision by the Federal Energy Regulatory Commission (FERC) to arbitrarily reduce the return on equity (ROE) for New England transmission owners after more than a decade of uncertainty and inaction will have significant negative impacts for both transmission owners and customers across the region.
• We believe [FERC's decision] is inconsistent with the statutory limitations imposed by the Federal Power Act (FPA).
• New England urgently needs expanded transmission capacity and modernized infrastructure to support reliability and the integration of additional energy supply, which is essential to addressing energy affordability challenges in the region.
• This decision would have a devastating impact on those efforts by eroding investor confidence, raising the cost of capital required for vital infrastructure improvements, and risking cascading negative consequences for customers both now and in the decades ahead.
• If FERCs retroactive refund order beyond the 15-month statutory limit is upheld, it would signal that rates can be adjusted using decade old data, increasing regulatory risk, raising borrowing costs caused by the likelihood of credit downgrades, and making future transmission projects more expensive—costs ultimately borne by customers.

Industry Context

StockSavvy.ai notes that the FERC decision on ROE for New England transmission owners highlights ongoing regulatory challenges within the U.S. utility sector, particularly concerning the balance between investor returns and consumer costs for critical infrastructure development. This ruling could set a precedent for other regions, potentially impacting the investment climate for necessary grid modernization and renewable energy integration across the broader utility industry.

Comparison to Industry Standards

• NA

Legal Proceedings

• Eversource is taking legal action to prevent damaging financial repercussions from retroactive refunds, including filing a motion for stay of the FERC order.
• Eversource, along with other New England transmission owners, is evaluating a Section 205 filing with FERC, which is a formal request under the FPA to change rates.
• Eversource and other transmission owners are evaluating legal and regulatory responses to the FERC order, including filing a request for rehearing and a motion for stay.

Stakeholder Impact

• Shareholders: Negative impact on future after-tax earnings and revised downward earnings guidance. Increased regulatory risk and potential for credit downgrades could affect stock valuation.
• Customers: FERC decision risks cascading negative consequences, including higher costs for future transmission projects, ultimately borne by customers. However, past infrastructure investments have delivered significant benefits, including billions of dollars in savings from eliminated congestion costs.
• Investors: Erodes investor confidence and raises the cost of capital required for vital infrastructure improvements.
• Transmission Owners (New England): Significant negative impacts due to reduced ROE and increased regulatory uncertainty.

Next Steps

• Eversource is taking legal action to prevent damaging financial repercussions from retroactive refunds, including filing a motion for stay of the FERC order.
• Eversource, along with other New England transmission owners, is evaluating a Section 205 filing with FERC to formally request a change in rates.
• Eversource and other transmission owners are evaluating legal and regulatory responses to the FERC order, including filing a request for rehearing and a motion for stay.
• If upheld, required refunds to transmission customers would be issued over an 18 to 24-month period in coordination with other New England transmission owners and ISO New England, and with FERC's approval.

Key Dates

Recommendation

The FERC decision introduces significant regulatory uncertainty and a material negative impact on Eversource's near-term earnings, leading to a downward revision of guidance. While the company is pursuing legal and regulatory avenues to mitigate these effects and maintains a long-term growth outlook, the immediate headwinds and increased risk warrant a cautious 'hold' stance until the outcomes of these challenges become clearer. The strategic Aquarion sale provides some capital flexibility, but its immediate earnings impact is negative.

Keywords

Eversource Energy, FERC, Return on Equity, ROE, Transmission, New England, Regulatory Risk, Earnings Guidance, Aquarion Sale, Utility, Energy Infrastructure, ES, Electric Utility, Power Grid