In our view, financial strength of the ES core utility business should allow for stable earnings. Risks to achieving our target price include:
(1) Earned ROE risk: If ES earns ROE below our assumed earned ROEs across its utilities, its EPS will be negatively impacted. Conversely, if ES overearns our estimates may prove conservative.
(2) Rate case risk: If ES achieves a rate case outcome below our forecast in any of the jurisdictions, our estimates will be negatively impacted.
(3) FERC ROE risk: This remains a concern as FERC finalizes its new approach to calculating the range of reasonableness for FERC ROEs. Our estimates already incorporate FERC base ROE cut to 10.57% level; however, further downside is possible if FERC takes an adverse action on currently pending complaints.
(4) Slowdown in spending on reliability-driven transmission and distribution programs: This could translate into slower earnings growth rate than we currently anticipate.
(5) Storms: There is a risk that the state governments or utility regulators will implement significant penalties on Eversource as result of its handling of the large weather events that have impacted their customers.
(6) Offshore wind project write down: There is a risk that Eversource would write down one or more offshore wind projects due to higher operating and financing costs.
If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price. Likewise, if any of these factors proves to have less of an effect than we anticipate, the stock could outperform our target.
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