Gas utility earnings, capex plans remain resilient despite inflation

Gas utility profits and capital spending plans are largely holding up in the face of persistent inflation and rising interest rates, quelling concerns that the challenging economic backdrop would curb investment and earnings prospects.

Quarterly earnings reports and newly issued 2024 guidance showed that gas distributors are still grappling with rising costs and interest expense but continue to find ways to offset the headwinds. In a critical indicator of the sector's ability to grow profits and rate bases, most of the companies that refreshed their five-year plans intend to increase spending on capital projects or roll forward current investment levels.

Six out of eight gas utility operators selected by S&P Global Commodity Insights beat Wall Street's expectations for third-quarter or fiscal fourth-quarter EPS. Five of the companies also topped year-ago EPS results.

Among the five companies in the group that updated their business outlooks, four expected to maintain or grow capital spending plans. Large-cap gas distributor Atmos Energy Corp., seen as a bellwether for the sector, offered a bullish outlook, increasing its five-year capital plan by $2 billion.

Atmos' outlook, along with strong quarterly earnings and 2024 guidance from the eight-state gas distributor, "bucks the prevailing headwinds facing [local distribution companies] and the utility space at large this year — primarily inflation and higher interest rates," Mizuho Securities USA analyst Gabriel Moreen said in a Nov. 9 research note.

Capital spending mostly remains intact

In the following weeks, St. Louis-based Spire Inc. and New Jersey Resources Corp. forecast EPS growth in 2024 and said they planned to slightly increase capital expenditure budgets over a 10-year and 2-year period, respectively.

UGI Corp. proved the exception within the sector. The diversified energy delivery company forecast that 2024 EPS would be roughly flat. It additionally scaled back its five-year capital spending plan and rate base growth outlook for its regulated Pennsylvania and West Virginia gas distribution business.

Distinguishing UGI from its gas utility peers, the company is grappling with not only industrywide challenges but also operational struggles at its Amerigas Propane Inc. segment, the focus of a strategic review and the source of an earnings drag that prompted cost cuts and balance sheet repair.

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Rounding out the forecasts, One Gas Inc. on Nov. 29 warned investors that EPS will likely fall year over year in 2024 as the company faces debt maturities. The company raised its five-year capital plan by $650 million to maintain a growing system and capture future growth in its Kansas, Oklahoma and Texas territories.

Better-than-expected performance

One Gas additionally stood out for its financing needs over the forecast period. While its peers anticipated moderate equity needs, One Gas anticipated higher-than-normal equity issuances through 2028 to finance capex while maintaining its capital ratios and credit metrics.

Utility stock price declines in 2023 have made equity issuances a less attractive financing option. In a Nov. 30 research note, Guggenheim Securities analyst Shahriar Pourreza said increased equity dilution would be a more important financial drag for One Gas than the company's upcoming debt maturities. On a year-to-date basis, One Gas lags all other stocks in Commodity Insights' basket of gas utilities, except UGI.

Chesapeake Utilities Corp., Northwest Natural Holding Co. and Southwest Gas Holdings Inc. have yet to report full-year 2023 earnings and update forward guidance.

Multi-utilities additionally performed better than expected on three key metrics — 2023 EPS, equity needs and capex plans — according to Scotiabank Global Equity Research analyst Andrew Weisel.

"Starting with earnings, we're impressed that most companies maintained their midpoints despite high-profile pressures," Weisel said in a Nov. 9 research note. "Several increased their capex plans, in contrast to our concerns that spending may be constrained by balance sheets and affordability."

Weisel counted Consolidated Edison Inc., CenterPoint Energy Inc., Eversource Energy, Entergy Corp., WEC Energy Group Inc. and CMS Energy Corp. among the quarter's winners. DTE Energy Co. and Duke Energy Corp. posted comparatively disappointing results, in his view.

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