25 Jul, 2023
Cool spring compounds interest rate, inflation pressure for US utilities in Q2
By Abbie Bennett
Mild weather in the first quarter that stretched further into the year compounded a challenging macro environment for US utilities across the country, analysts tracking the sector said as the second-quarter earnings season begins.
While most US utilities reported first-quarter earnings that beat analyst estimates, a few that missed expectations attributed it to the mild winter and corresponding below-normal heating demand. But overall energy demand has not picked up. The second quarter of 2023, compared to a strong second quarter of 2022, continues a trend of challenges begun by the weather in the first quarter, analysts said, despite some areas with spiking temperatures.
Utility management has strategies for offsetting the effects of weather in good years and bad years, but 2023 has been different so far.
"This year is a little bit unique," Scotia Capital analyst Andrew Weisel told S&P Global Commodity Insights in a July 25 interview. "Not only do we have two consecutive quarters of really [mild] weather, but companies were already starting from a bad spot in terms of pressure from interest rates rising as well as general inflation."
Nationwide cooling degree days in the second quarter were down 25% from normal and down 30% year over year, Weisel noted in a July 21 earnings preview.
The Pacific region was the mildest compared to normal, followed by the Northeastern regions. Dominion Energy Inc. stands out because it reduced guidance for the second quarter of the year, which Weisel said was in large part because of the weather and nuclear outages. Weisel noted pressure on Duke Energy Corp., American Electric Power Co. Inc. and First Energy Corp., among others.
The second quarter, known as the "shoulder season," is generally considered less important to earnings than other quarters, but the colder-than-normal early summer is "particularly disappointing" given previous expectations of El Niño weather conditions. July conditions have been hotter so far, though, helping offset earlier weakness, Weisel added.
Customers will fare better given the mild weather, Weisel told Commodity Insights, which could help utilities under regulatory scrutiny over customer bills.
Strong second-quarter 2022 results contrast the weaker second quarter of this year, Guggenheim Securities analyst Shahriar Pourreza said, setting the industry up for potentially heightened misses, with CMS Energy Corp., CenterPoint Energy Inc., Dominion and DTE Energy Co. shouldering the biggest potential impacts from weather as a percentage of annual earnings.
Severe storms in parts of the Midwest are also likely to affect utility results in those territories, KeyBanc analyst Sophie Karp wrote in a July 18 report.
Despite record hot weather in some parts of the US, July daily average demand is flat year over year, BofA Securities analyst Julien Dumoulin-Smith wrote in a July 20 report, citing data from the US Energy Information Administration. If July temperatures remain high across the US, it could help offset earlier negative effects, analysts said.
"Attention will fall squarely on management measures to mitigate these additional pressures," BMO Capital Markets analyst James Thalacker wrote in a July 24 earnings preview.
While utilities sometimes narrow guidance later in the year to account for unpredictable summer weather, 2023 could be different, with some utilities potentially lowering guidance if the third quarter does not go well, according to Weisel.
"I'm almost certain we'll see less of those upward guidance range revisions in October-November than normal," Weisel said.
According to the El Niño–Southern Oscillation report issued July 13, a weak El Niño remains in place. Weather forecasters expect conditions to strengthen through the fall and peak in the period between November 2023 and January 2024 with moderate to strong intensity. A strong El Niño means sea surface temperatures in the central and eastern tropical Pacific are well above normal, which can result in cooler- and wetter-than-average conditions across the Southern US and East Coast and warmer- and drier-than-average conditions in the Northern US and the Great Lakes.
Alternately, while weather impacts moved earnings for some utilities and are worth following, CreditSights analyst Andy DeVries told Commodity Insights that weather was not a "big swing factor either way" since it does not move stock or bond prices. Utility investors should not trade their stocks based on short-term weather conditions unlikely to affect long-term growth, Weisel said.
Earnings beats, misses
Of the top 15 North American electric companies, Southern Co., Duke Energy, Constellation Energy Corp., First Energy, Entergy Corp. and Canada-based utility Hydro One Ltd. are all expected to post year-over-year earnings declines, according to an S&P Global Market Intelligence analysis of S&P Capital IQ consensus estimates.
American Electric Power Co. Inc., Exelon Corp., PG&E Corp., Xcel Energy Inc., Edison International, Eversource Energy, Canada-based Fortis Inc., and PPL Corp. are all expected to beat second-quarter 2022 earnings results, the analysis shows.
On July 25, NextEra Energy Inc. reported second-quarter adjusted earnings of $1.78 billion, or 88 cents per share, compared with $1.59 billion, or 81 cents per share, in the year-ago quarter. The S&P Capital IQ normalized consensus EPS estimate for the quarter was 81 cents. The company reiterated 2023 adjusted earnings guidance of $2.98 to $3.13 per share.
Of the North American multi-utilities, Sempra, Dominion, Public Service Enterprise Group Inc., WEC Energy Group Inc., Ameren Corp., CenterPoint Energy Inc., Canadian Utilities Ltd., Algonquin Power & Utilities Corp., Black Hills Corp. and ATCO Ltd. are forecast to report lower earnings per share compared to the second quarter of 2022.
Consolidated Edison Inc., DTE, CMS and NiSource Inc. are projected to beat 2022's earnings results, the analysis shows. NorthWestern Corp. was projected to beat 2022 earning results, but it posted non-GAAP EPS of 35 cents per diluted share on July 24, compared with consensus estimates of 52 cents per share, primarily due to weather driving lower electric and natural gas retail volumes, transmission revenues and other factors.
Dominion, Public Service Enterprise Group, CMS and ATCO are expected to report an uptick in year-over-year revenue.
M&A slowdown continues
As weather and rising interest rates add to sector headwinds, the market for asset and business sales could remain cool.
Following Duke's announcement of agreements to sell its commercial renewables business, Dominion remains one of few utilities to watch for transaction announcements, Karp said. The company made a deal to sell its remaining stake in Cove Point LNG LP, but KeyBanc analysts estimated Dominion will need to sell other assets to achieve its balance sheet goals.
"We've seen a lot of these companies doing a back-to-basics strategy" selling noncore assets, Weisel said. "Essentially, anything that is not a regulated utility can be considered up for sale."
But many of those deals are already done or announced. And while a higher-interest-rate environment may make such deals more difficult, interest may persist from private investors looking for their part in the clean energy transition, Weisel said.