One year after gas utilities began sounding the alarm over inflation, the profit impacts from stubbornly high costs, rising interest rates and mild winter weather have proved too much for some companies to overcome with cost-saving measures.
Five out of eight gas utility operators selected by S&P Global Commodity Insights missed Wall Street's EPS expectations for the second calendar quarter of 2023. Additionally, four of the companies saw quarterly profit fall from a year ago, despite forecasts for just one company to report a year-over-year EPS contraction.
In light of warmer-than-normal weather, some gas utilities acknowledged that they had few opportunities left to offset the higher costs and rates that defined 2023.
"We continue to exercise all the controls we can in the time we have left this year," Spire Inc. CFO Steven Rasche told analysts Aug. 2 after the St. Louis-based gas distributor reported an unexpected third-quarter loss and trimmed full-year earnings guidance. "We earn our margins and recovery during the winter and early spring. And so that ship has largely sailed."
Warm winter
The four companies that fell short of both expectations and year-ago EPS — Chesapeake Utilities Corp., One Gas Inc., Spire and UGI Corp. — were among the first gas utilities to issue profit warnings in 2022. For some of that group, mild winter weather continued into April, tempering customer gas usage.
Spire's Alabama, Mississippi and Missouri footprint experienced 18% fewer heating degree days than normal, with an ineffective weather normalization mechanism exacerbating the impact in Alabama. UGI saw 11% fewer heating degree days than usual in Pennsylvania and West Virginia during its fiscal third quarter. For the first half of 2023, Chesapeake's Ohio and Maryland-Delaware territories saw 15% and 24% fewer heating degree days, respectively, creating 38 cents of negative EPS impact.
At Spire and UGI, fiscal third-quarter adjusted earnings in the utility segment dropped as operations and maintenance expenses rose. Spire lowered its full-year EPS guidance range by 5 cents. UGI guided toward the bottom end of its EPS range and announced new cost control measures.
The earnings shortfalls were further evidence that cost mitigation efforts deployed by gas utilities can only do so much to offset added earnings challenges in the current inflationary environment.
"These efforts will continue through the remainder of the year, where our focus is to restore as much as possible of these earnings," Chesapeake President, CEO and Chairman Jeff Householder said during an Aug. 4 second-quarter earnings conference call. "Significantly colder temperatures later in the year would certainly be a big help."
Large gas utilities not immune
Large-cap gas distributor Atmos Energy Corp. was among the companies to undershoot expectations, reporting fiscal third-quarter EPS of 94 cents against expectations for 99 cents. Mizuho Securities USA analyst Gabriel Moreen called it "a rare miss that underscored [Atmos] is not immune to higher inflationary pressures that have similarly plagued utility peers."
While Atmos grew earnings from a year ago and reaffirmed full-year 2023 guidance, elevated operations and maintenance expenses remained a headwind for the eight-state gas distributor. Through its first three fiscal quarters, O&M expenses in the gas utility segment increased by $48 million, or 12.6%, though the year-over-year increase moderated to 3.5% in the third fiscal quarter.
Among the drivers for the increase were higher contractor costs and line location work spurred by robust construction activity in Texas. The company also saw an uptick in service orders to support customer growth, bill collection activities and call centers, which handled increased volumes when elevated gas prices sent monthly bills higher.
Atmos is facing a dilemma similar to One Gas. The companies are seeing strong customer growth, particularly in Texas, at a time when labor and materials are more expensive and rising interest rates make it more costly to finance projects. To better control long-term costs, One Gas said it had begun insourcing some pipeline damage prevention work, namely line location.
Inflation moderates but interest rates rise
One Gas lowered its long-term EPS growth forecast in December 2022, but some analysts saw earnings pressure unwinding for the company as inflation normalizes. The US consumer price index rose 3% year-over-year in June, moderating from a 9% gain in June 2022 and approaching the Federal Reserve's 2% target.
Easing inflation paired with lower gas prices "suggests that the headwinds [One Gas] had anticipated it would face both this year and in the near future may turn out to be less of a drag than what guidance currently embeds," Guggenheim Securities analyst Shahriar Pourreza said in an Aug. 1 research note.
– Access
– Explore full coverage
Analysts acknowledged that interest expense would remain a hurdle for One Gas and other utilities. One Gas' average commercial paper balance was down 50% from a year ago in the second quarter, but its weighted average interest rate for the short-term debt remained about 4 times higher than year-ago rates, CFO Caron Lawhorn said during an Aug. 1 earnings call.
Rounding out the quarterly earnings, New Jersey Resources Corp. and Southwest Gas Holdings Inc. were the group's only constituents to surpass analysts' expectations and year-ago earnings. Northwest Natural Holding Co. topped EPS forecasts but fell short of year-ago earnings.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.