Persistent inflation and other macroeconomic challenges have begun to impact some gas utility operators' earnings just months after executives said costs were clearly rising but that impacts remained manageable.

Many of the most impacted names were diversified gas utilities with substantial nonregulated subsidiaries, as rising costs weighed on the parent company's earnings. Many of the sector's pure-play gas distributors and multi-utilities said they were continuing to digest material and labor costs, supply chain constraints, labor shortages and higher borrowing expenses.

The quarterly reporting period wrapped just as federal data showed inflation finally moderating, but the news was cold comfort for some gas utilities.

Headwinds hammer earnings, cloud profit outlook

The first signs of trouble arrived on UGI Corp.'s Aug. 4 conference call. Executives warned that earnings may fall short of their 2022 guidance, which had already been revised lower. Inflation, commodity price volatility and labor shortages continued to undermine UGI's U.S. and European liquefied petroleum gas businesses.

Chesapeake Utilities Corp. also prepared investors for near-term earnings headwinds due to inflation, supply chain crunches and regulatory delays. The outlook overshadowed the company's quarterly EPS, which handily beat Wall Street's expectations.

Chesapeake Utilities executives were seeing inflation in "virtually every corner of our business" — which includes regulated gas transmission and distribution as well as nonregulated segments like virtual pipeline services — President and CEO Jeff Householder said during an Aug. 4 call.

The news was also mixed at National Fuel Gas Co. The company's regulated utility expected to post margin growth, but executives said rising costs would offset most of the benefit. The utility is shouldering higher costs to retain employees in a tight labor market while materials, third-party contractors and fuel price inflation are eroding profits, National Fuel Treasurer and Principal Financial Officer Karen Camiolo said on an Aug. 5 call.

Still, rising commodity costs are boosting the company's gas production unit, prompting National Fuel to raise 2023 EPS guidance by 27%.

Southwest Gas Holdings Inc. capped off the earnings season with a double whammy: lowered guidance on several fronts and the widest quarterly EPS miss among nine gas utilities selected by S&P Global Commodity Insights. Headwinds in the quarter included higher bad debt resulting from service disconnections among customers struggling with rising costs, executives said during an Aug. 10 conference call.

The company's nonregulated construction services business also booked higher interest expense as the Federal Reserve fought inflation by hiking rates. The earnings results briefly deepened a stock price pullback that began a week earlier when Southwest Gas announced it would not sell its gas utility in a package deal with its construction and midstream units.

Sector stalwarts weather challenges for now

Other gas distributors said inflation remained manageable and outlined steps they were taking to navigate rising costs and tight supplies.

Inflation has been less pronounced in services, which accounts for 85% of DTE Energy Co.'s spending, CFO David Ruud said during a July 28 conference call. As such, the company is looking for ways to optimize its long-term service contracts, Ruud said.

"We see the inflation," Ruud said. "We feel it with the wages, but within our planning process, we don't see it impacting our capital plans or our [operations and maintenance] going forward, as we continue to find offsets for it."

In its regulated business, AltaGas Ltd. is seeing the largest inflationary pressures in fuel costs, including vehicle fleet expenses and paving, which has a high energy-use component, Donald Jenkins, president of the company's utilities segment and its Washington Gas Light Co. subsidiary, said during a July 28 conference call.

Asked about the anticipated impact on utility capital expenditures, Jenkins said AltaGas does not anticipate that inflation will increase its capex budget, but it does expect to "get slightly less work done for the same dollars."

CenterPoint Energy Inc. is also seeing inflation on the materials side. CenterPoint CFO Jason Wells said multiyear union agreements with fixed annual labor cost increases have somewhat insulated the company from wage inflation, similar to AltaGas.

"So for that reason, we're not necessarily seeing the cost impact of inflation on [operations and maintenance] quite as much as one may think," Wells said during an Aug. 2 conference call.

Gas distributors tinker with supply chain

Atmos Energy Corp. President and CEO Kevin Akers credited recently refreshed contractor and vendor agreements for offsetting inflationary headwinds.

Additionally, Atmos is considering changing its policy to secure a nine-month inventory of pipe to stay ahead of supply chain constraints, Akers said during an Aug. 4 conference call. Currently, Atmos tries to keep six months of inventory on hand. The company has enough pipe to complete its 2022 capital spending plans, and it is looking for material for projects in 2023 and 2024, Akers said.

One Gas Inc. has also been diversifying its supply chain. It has leveraged a multiyear initiative to identify new suppliers that "has paid off during these challenging times," according to COO Curtis Dinan. Dinan said on an Aug. 2 conference call that while things have not returned to normal, supply chain improvements have reinforced executives' confidence in their capital investment forecast.

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