Eversource Energy: Navigating Regulatory Headwinds and Offshore Wind Uncertainties – A Credit Risk Analysis

In the ever-evolving landscape of energy infrastructure, Eversource Energy (NYSE: ES) faces mounting scrutiny as regulatory and financial challenges threaten its creditworthiness. With Fitch Ratings recently downgrading the outlook for Eversource and its subsidiaries to “negative,” investors must weigh the company's strategic vulnerabilities against its renewable energy ambitions. At the heart of these concerns lie delayed offshore wind project sales, a contentious regulatory environment in Connecticut, and the urgent need to deleverage through uncertain equity markets. This analysis explores the near-term risks and argues for a cautious investment approach until key uncertainties are resolved.

The Negative Outlook: A Perfect Storm of Uncertainties

Fitch's decision to downgrade Eversource's outlook stems from two critical factors: the stalled sale of its offshore wind projects and the financial strain of navigating Connecticut's restrictive regulatory framework. The company's 50% stake in three offshore wind initiatives—South Fork Wind and Revolution Wind among them—has become a linchpin for its debt-reduction strategy. However, New York regulators' rejection of a proposed price increase for one project has forced a potential re-bid process, which could slash projected proceeds.

The sale's delay exacerbates Eversource's already weak financial profile. Fitch notes that proceeds from the transaction were critical to reducing debt, which stood at $13.3 billion as of Q1 2025. With equity issuance now a necessity to “right-size” its balance sheet, the company faces a precarious balancing act: issuing shares to dilute ownership or risk further downgrades if debt remains elevated.

Offshore Wind: A Riskier Proposition Than Expected

Eversource's offshore wind ventures, developed in partnership with Ørsted, were initially seen as crown jewels in its renewable portfolio. However, the projects now represent a double-edged sword. The complexity of the asset class in North America, coupled with joint venture governance challenges, has slowed the sales process. Fitch highlights that the projects' value hinges on power price assumptions that may no longer hold true, particularly given regulatory pushback in New York.

Investors should note that delays in closing the sale could force Eversource to raise equity at suboptimal prices. The company's first-quarter 2025 earnings of $550.8 million provide a veneer of stability, but its Q3 2024 loss of $118.1 million underscores the volatility tied to regulatory and operational execution risks.

Connecticut's Regulatory Tightrope

While FERC's supportive policies for transmission projects offer some relief, Connecticut's regulatory environment remains a thorn in Eversource's side. The state's performance-based regulation and Senate Bill 7 have capped authorized returns on equity (ROE) at below-average levels, stifling profitability for subsidiaries like Connecticut Light and Power. Fitch terms this environment “meaningfully less-constructive,” a stark contrast to the favorable treatment Eversource receives from federal regulators.

The Connecticut Public Utilities Regulatory Authority's (CPURA) focus on cost containment and efficiency metrics leaves little room for error. Any misstep in meeting these benchmarks could further strain cash flows, compounding pressure on Eversource's already constrained balance sheet.

Equity Issuance: A Double-Edged Sword

Fitch's call for significant equity issuance in 2024–2025 to strengthen the balance sheet highlights a critical vulnerability: timing. If Eversource must issue shares in a down market, dilution could weigh on stock performance. Meanwhile, its $21.5 billion capital expenditure (capex) plan through 2027—split between electric distribution, natural gas, and FERC-regulated transmission—relies heavily on cost-recovery mechanisms. While FERC's policies ensure timely returns, Connecticut's regulatory headwinds may delay or reduce the benefits of these investments.

Investment Thesis: Proceed with Caution

The risks are clear: Eversource's creditworthiness hinges on closing offshore wind sales at favorable terms, navigating Connecticut's regulatory maze, and executing equity raises without dilution. Until these uncertainties are resolved, the company's near-term credit profile remains fragile. Fitch's negative outlook signals that further downgrades are possible if the offshore sale stalls or regulatory pressures intensify.

Recommendation:
- Hold or Reduce Exposure: Investors should avoid aggressive positions in ES until clarity emerges on the offshore wind sale and Connecticut's regulatory landscape.
- Monitor Credit Metrics: Track Eversource's debt-to-equity ratio and any updates on the sale process. A successful closing could unlock a ratings upgrade and stabilize the stock.
- Peer Comparisons: Consider alternatives like AVANGRID (AGR), which faces fewer state-specific regulatory hurdles and has a stronger credit profile.

Conclusion

Eversource Energy's journey to becoming a renewable energy leader is clouded by near-term financial and regulatory risks. While its offshore wind ambitions align with long-term decarbonization goals, the execution challenges and Connecticut's restrictive environment create significant headwinds. For now, investors are advised to maintain a cautious stance, prioritizing capital preservation until the company secures the offshore wind sale and achieves regulatory stability. The path forward is fraught with uncertainty—caution remains the watchword.