Wall Street expects mixed first-quarter earnings from gas utility operators as mild winter weather compounds existing headwinds.
Analysts expected half of the eight gas utilities selected for analysis by S&P Global Commodity Insights to report higher quarterly profits compared with the year-ago period. In the prior quarter, all but one posted year-over-year EPS growth.
Meanwhile, analysts anticipated that just four out of 15 multi-utilities will report year-over-year EPS growth, according to consensus EPS forecasts.
Weather woes
A warm start to 2023 sets up a tough comparison with the colder-than-normal first quarter of 2022, Morningstar Research Services energy and utilities strategist Travis Miller said. It will also pressure utilities to manage operating costs through 2023 in order to hit earnings targets, he said.
"Gas utilities are going to have a little bit of a catch-up to do the rest of the year given the less favorable winter weather," Miller told Commodity Insights.
In the first quarter, nationwide heating degree days were down 5% from normal and 8% lower year over year, according to Scotiabank analyst Andrew Weisel. In an April 21 research note, Weisel noted that many gas utilities benefit from weather normalization clauses.
Among multi-utilities, CMS Energy Corp., DTE Energy Co. and WEC Energy Group Inc. could be most affected by weather, Weisel said. Guggenheim Partners added Duke Energy Corp., Southern Co. and Dominion Energy Inc. to its April 21 list of most weather-impacted stocks.
Decoupling mechanisms could shield Consolidated Edison Inc., Eversource Energy, Exelon Corp. and Public Service Enterprise Group Inc., Weisel said. CenterPoint Energy Inc., Exelon, Ameren Corp., Sempra and PPL Corp. made Guggenheim's list of lower-risk multi-utilities. Decoupling mechanisms, in part, allow utilities to add a surcharge to bills to offset impacts from mild winters.
Macro headwinds persist
This pressure comes as utilities are grappling with working capital and short-term debt impacts from deferred fuel cost balances, Weisel said. That is exacerbating pressure from "materially higher" interest expense and inflationary pressure, both of which are subject to regulatory lag, he said.
"On top of the unfavorable weather, companies face among the strongest headwinds we've seen in years," Weisel said.
Miller said he expected gas utility dealmaking to remain muted in the higher interest rate environment, despite a report that Dominion and National Grid PLC are exploring transactions.
"Given what we've seen in the market the last two years, I doubt there's going to be a whole lot of interest," Miller said. "I'm not expecting either of those efforts to have much impact on ... the valuations for other gas utilities."
Fewer utilities with EPS growth
Analysts said they expected pure-play gas distributors Atmos Energy Corp. and One Gas Inc. to post a sixth consecutive quarter of year-over-year profit growth.
They anticipated Northwest Natural Holding Co. reporting a fourth straight quarter of EPS growth and Spire Inc. building on last quarter's turnaround, which broke four quarters of earnings contraction.
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Wall Street expected a pause in EPS growth at New Jersey Resources Corp. and UGI Corp. The consensus estimate saw Chesapeake Utilities Corp. slipping back into EPS contraction as the company deals with earnings headwinds following a prolonged streak of EPS growth that faltered in late 2022.
Meanwhile, Southwest Gas Holdings Inc. is poised to post an eighth consecutive quarter of EPS contraction, as the company realigns its business following a settlement with activist investor Carl Icahn.
The multi-utilities tipped to post higher earnings were ConEd, CenterPoint, NiSource Inc. and NorthWestern Corp.
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