Natural gas utilities are deploying some of the same strategies that helped them weather the Great Recession, but executives say the industry has also changed considerably over the past decade and the coronavirus presents a new set of challenges.

Utilities are bracing for a drop in gas volumes and electric power load during the looming recession, just like they experienced in the 2007-2009 downturn. Once again, they are looking to take out costs, but new or expanded technologies and regulatory policies also give some utilities additional levers to pull.

To be sure, the pandemic is very different from the housing and financial market crashes, according to WEC Energy Group Inc., a multi-utility that generates about 38% of its pretax margin from gas utilities in Wisconsin, Minnesota, Michigan and Illinois. While the coronavirus crisis developed more abruptly than the recession earlier in the century, WEC's industrial customers remain more positive about the long-term economic outlook, the company recently told Guggenheim Partners.

Analysts are keenly focused on these large customers. Industrial gas consumers, including automakers and other manufacturers, accounted for nearly 30% of U.S. gas demand in 2019, according to the Energy Information Administration. Commercial customers, chiefly represented by large property owners, made up more than 12% of demand, compared with a nearly 18% share among households.

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"There's no question that business demand for electricity (and to a lesser degree, natural gas) will be down sharply in March and 2Q20," Scotiabank analyst Andrew Weisel said in a March 31 research note.

The COVID-19 pandemic recently prompted Goldman Sachs to cut its earlier forecast for April-May industrial gas demand by 2.5 Bcf/d.

Residential uptick could offset industrial demand drop

One key uncertainty is the degree to which household gas demand will offset industrial consumption, as a growing number of Americans self-isolate at home. Analysts and utility executives widely anticipate that residential electric power and gas demand will increase. Distributing gas to homes is a higher margin business than supplying industrial customers, so an increase in residential demand more than offsets an equivalent drop in industrial consumption.

Multi-utilities such as Dominion Energy Inc. and Duke Energy Corp. with a high percentage of residential customers are best positioned, according to Weisel. He said those companies, such as Consolidated Edison Inc., Public Service Enterprise Group Inc. and Eversource Energy, that are most exposed to commercial customers look more challenged.

Giving a window into the expected gains and losses, some utilities have better real-time visibility now into the shift from industrial to residential volumes because they have deployed advanced electric and gas meters in the years since the financial crisis.

DTE Energy Co., which distributes electricity and gas in Michigan, told Guggenheim that the utility's advanced metering infrastructure already shows an uptick in residential consumption, though the company said it is not relying entirely on this load shift to weather the impacts from a recession.

Instead, DTE is turning to its 2008 playbook, which included freezing hiring, cutting overtime and reducing its reliance on contractors. Those efforts created more than $100 million in savings per year during the Great Recession, the company said, and DTE estimated these tactics could yield $130 million to $150 million in cost cuts this time around.

WEC is targeting similar restrictions to its operations and management budget. NorthWestern Corp. told Guggenheim it is paring travel and training costs, while looking to cut general and administrative expenses and boost efficiencies. However, Northwestern — which distributes gas in South Dakota, Nebraska and Montana — said those offsets would be harder to utilize the longer load remains depressed.

Some gas utilities are better positioned for COVID-19 than others

Weisel at Scotiabank noted that ConEdison and Eversource could benefit from utility rate decoupling — a regulatory policy that aims to reduce the impact of total electric or gas sales on overall profits in order to minimize a company's incentive to sell more energy.

For gas utility operators that already benefit from decoupling, including Southwest Gas Holdings Inc. and NiSource Inc., the policy will protect them from the effects of near-term demand declines, UBS analysts Aga Zmigrodzka and Shneur Gershuni said in an April 1 research note. The fact that Southwest Gas benefits from decoupling in all of its territories contributed to UBS upgrading its stock to "buy."

UBS also upgraded Dallas-based Atmos Energy Corp. to "buy" on strong financial metrics that reduce the possibility that the company will dilute earnings by issuing equity to fund projects while its stock price is depressed. UBS said investors do not fully appreciate the company's growth profile, which is underpinned by a backlog of leak-prone pipes that need to be replaced for safety purposes.

Still, UBS lowered its earnings estimates for Atmos by 1% for each year between 2020 and 2022, citing lower anticipated industrial and commercial demand due to the COVID-19 pandemic, as well as weaker customer growth resulting from a battered Texas energy sector following the collapse in oil prices.

The bank also cut earnings estimates through 2022 at Southwest Gas because COVID-19 threatens to weigh on the company's energy infrastructure construction business as utilities potentially cut capital spending and authorities place restrictions on construction work.