Wall Street is expecting an underwhelming earnings reporting period from gas utility operators as mild second-quarter weather continued to create headwinds for the sector.
The outlook was brighter for utilities with a sharper focus on distributing natural gas. Analysts expect seven out of eight gas utilities selected by S&P Global Commodity Insights to match or exceed year-ago earnings per share.
Wall Street forecasts EPS growth from Atmos Energy Corp., Chesapeake Utilities Corp., Northwest Natural Holding Co., Spire Inc. and Southwest Gas Holdings Inc. New Jersey Resources Corp. and One Gas Inc. are poised to report EPS in line with year-ago results, according to S&P Capital IQ consensus EPS forecasts. Analysts anticipated a year-over-year EPS decline at UGI Corp.
Weather normalization mechanisms largely shielded the group from warm winter weather, but just half of the group beat Wall Street's expectations or posted year-over-year EPS growth in the first quarter.
Forecasts for multi-utilities were bleaker. In a group of 15 electric and gas distributors, two-thirds are poised to report a decline in EPS, according to consensus estimates.
While the second quarter marks the start of the shoulder season, when gas utilities often report muted earnings, cool April weather can help companies meet their full-year earnings guidance. Many multi-utilities also saw fewer than normal cooling degree days during the quarter, which affects electric operations.
Weather matters in particular for Midwest utilities, where regulatory mechanisms that normalize for weather impacts are less common, according to Guggenheim Partners. In states without those mechanisms, impacts from variations in heating and cooling degree days were minimal, but were negative on balance in most cases, Guggenheim analysts led by Shahriar Pourreza said in a July 24 research note.
Guggenheim expected weather to have the biggest impacts on CMS Energy Corp., CenterPoint Energy Inc., Dominion Energy Inc. and DTE Energy Co. It projected minimal impacts on Southern California Gas Co. parent Sempra, Exelon Corp. and Eversource Energy.
Morgan Stanley analyst David Arcaro also expected the mild weather to create EPS headwinds for utilities, with high interest rates creating additional drag. However, executive teams will likely wait to reassess full-year guidance until they review third-quarter results, he said in a July 20 research note.
In April, Scotiabank analyst Andrew Weisel said utilities were facing the strongest headwinds in years. In a July 21 research note, he ticked off a list of market forces that continue to weigh on utility sector cash flows and credit metrics: "robust levels of capital spending, high deferred fuel cost balances following the run-up in natural gas prices in 2022 ..., still-elevated levels of unpaid bills, and the effects of rising interest rates and general inflation on corporate expense structures."
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Weisel expected utilities to respond not with equity issuances but a continued focus on asset sales.
Among the utilities rumored to be exploring gas utility divestments and stake sales were Dominion Energy and National Grid USA.
In a separate July 24 research note, Guggenheim cited reports from PeakLoad, a news site focused on energy sector dealmaking, that bids were due by July 31 for Dominion's gas utility assets. Duke Energy Corp. was bidding for Dominion's North Carolina gas utility; Enbridge Inc., NiSource Inc. and UGI Corp. were in the running to acquire its Ohio distribution company; and several financial suitors were eyeing its Utah assets, Guggenheim said, citing PeakLoad data. Berkshire Hathaway Inc. has expressed interest in the entire portfolio, Guggenheim said.
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