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

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 revised 2026 earnings guidance.

Summary

• The Federal Energy Regulatory Commission (FERC) has arbitrarily reduced the return on equity (ROE) for New England transmission owners.
• Eversource Energy is taking legal action, including filing a motion for stay, and evaluating a Section 205 filing with FERC to change rates.
• The FERC decision, which used outdated, decade-old data, set a base ROE of 9.57% and a maximum ROE for transmission incentives of 12.09%.
• The change in base ROE and related transmission incentive adders is expected to lower Eversource's future after-tax earnings by approximately $70 million for 2026.
• Eversource has revised its 2026 non-GAAP earnings guidance to a range of $4.57 to $4.72 per share, factoring in the ROE impact and a $15 million negative impact from the potential Aquarion sale.
• The company expects cumulative long-term earnings per share growth of 5% to 7% through 2030, using the adjusted 2026 non-GAAP earnings guidance mid-point of $4.65 per share as the base year.
• Annual earnings growth is expected towards the upper half of its long-term guidance by 2028.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this as a significantly negative development due to the adverse regulatory decision impacting core earnings, the downward revision of guidance, and the increased regulatory risk for future investments.

Positives

• The Aquarion sale was recently approved by PURA, indicating progress on a strategic divestiture.
• Eversource expects annual earnings growth towards the upper half of its long-term guidance by 2028.
• Cumulative long-term earnings per share growth rate is projected to be within the range of 5% to 7% through 2030.

Negatives

• FERC's decision to reduce the return on equity (ROE) for New England transmission owners is expected to have significant negative impacts.
• The change in base ROE and related transmission incentive adders 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 is lower than previous expectations due to the FERC decision and the Aquarion sale impact.
• The potential Aquarion sale is expected to have a $15 million negative impact on 2026 non-GAAP earnings.
• The FERC decision is seen as eroding investor confidence and raising the cost of capital for vital infrastructure improvements.
• Retroactive refunds, if upheld, would be issued over an 18 to 24-month period.

Risks

• Cyber events or breaches, including acts of war or terrorism, affecting systems or third-party systems.
• 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, impacting 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 related to purchase price post-closing adjustment.
• Ability or inability to qualify for investment tax credits.
• Extreme weather, including severe storms due to climate change, and fluctuations in weather patterns.
• Adequacy, contamination of, or disruption in, water supplies.
• Physical attacks or grid disturbances damaging and disrupting 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, including disruptive technology or development of alternative energy sources.
• Substandard performance of third-party suppliers and service providers, or counterparties not meeting obligations.
• Limits on access to, or increases in, the cost of capital, including disruptions in capital markets or other events.
• 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.
• Regulatory uncertainty from FERC's inaction making it harder to attract capital and plan necessary long-term investment.
• Increased regulatory risk and higher borrowing costs due to potential credit downgrades if retroactive refund order is upheld.

Future Outlook

Eversource Energy has adjusted its 2026 non-GAAP earnings guidance to a range of $4.57 to $4.72 per share, reflecting the impact of the FERC ROE decision and the potential Aquarion sale. The company anticipates a cumulative long-term earnings per share growth rate of 5% to 7% through 2030, with annual earnings growth expected towards the upper half of this 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 this 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."
• "Eversource's ongoing infrastructure investments in the transmission system over the years have delivered significant benefits to customers, including eliminating significant congestion costs that have provided customers with billions of dollars in savings."
• "If FERC's 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 infrastructure investment and cost recovery. This ruling could set a precedent for other regions, potentially impacting the financial models and investment attractiveness of regulated utilities across the country. The emphasis on outdated data by FERC contrasts with the industry's need for current economic conditions to justify capital-intensive projects, potentially slowing critical grid modernization efforts.

Comparison to Industry Standards

• The FERC-mandated base ROE of 9.57% for New England transmission owners is a critical benchmark. Compared to historical industry averages for regulated utilities, which often range from 9% to 11%, this decision places Eversource at the lower end, especially considering current interest rate environments and inflation.
• The maximum ROE for transmission incentives at 12.09% provides some upside, but the overall reduction in base ROE could make New England less attractive for transmission investments compared to regions with more favorable regulatory frameworks or higher allowed returns, such as some states in the Midwest or Southeast that have historically offered ROEs closer to 10-11% for similar infrastructure projects.
• The company's projected long-term EPS growth rate of 5% to 7% through 2030, while solid for a utility, will be challenged by this regulatory headwind. This growth rate is generally in line with or slightly below the higher end of growth seen by some diversified utilities with significant renewable energy or unregulated segments, such as NextEra Energy (which often targets 6-8% EPS growth) or Duke Energy (4-6% EPS growth).

Legal Proceedings

• Eversource Energy 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.
• The company and other transmission owners are evaluating legal and regulatory responses to the FERC order, including filing a request for rehearing.

Stakeholder Impact

• Shareholders: Potential erosion of investor confidence, lower future earnings, increased regulatory risk, and potential credit downgrades could negatively impact share price and returns.
• Customers: Risk of cascading negative consequences, including higher costs for future transmission projects, despite past savings from Eversource's investments.
• Transmission Owners (New England): Significant negative impacts due to reduced ROE, making it harder to attract capital and plan necessary long-term investment.
• Regulatory Authorities (FERC): Facing legal challenges and requests for rehearing from transmission owners.

Next Steps

• Eversource Energy 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.
• The company and other transmission owners are evaluating legal and regulatory responses to the FERC order, including filing a request for rehearing.
• 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 direct negative impact on Eversource's 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 'hold' recommendation. Investors should monitor the outcome of legal challenges and future regulatory developments before making further investment decisions.

Keywords

Eversource Energy, FERC, Return on Equity, ROE, Transmission Owners, New England, Regulatory Risk, Earnings Guidance, Aquarion Sale, Utility, Energy Infrastructure, Electric Transmission, Financial Outlook, Legal Action