Fuel cost impacts, M&A to be key topics in US utility Q4'22 earnings discussions

North American electric and multiutility holding companies should still be able to maintain 2023 earnings guidance, even with several slated to report fourth-quarter 2022 declines as they grapple with customer bill pressure from soaring commodity prices and high interest rates.

Equity analysts at Scotiabank expect utilities to be "bucking the negative EPS revisions narrative" that has arisen as increased borrowing costs and a potential recession on the horizon reflect the Federal Reserve's continuing monetary policy tightening.

"Utilities usually show relative earnings/dividend strength during periods of economic stagnation/contraction. Not to say that they're immune to a deteriorating macro landscape, but on a relative basis, earnings and dividends could be more resilient than the market, on average," Scotiabank wrote in a Jan. 19 report. "We're already seeing this for 2023, with consensus forecasts for market EPS down sharply over the past 3-6 months vs. flattish estimates for pure-play utilities."

CreditSights analyst Andrew DeVries said the credit research firm expects "jam-packed" discussions on fourth-quarter 2022 earnings calls, pointing out that Duke Energy Corp., Dominion Energy Inc. and Southern Co. could address deferred fuel balances after incurring "billions of energy costs that they haven't billed customers for yet."

"An added bonus would be hearing utilities quantify the customer bill benefit, a word we haven't heard in a long time, from the recent large decline in natural gas prices, which pulled power prices down as well," DeVries said. "The 12-month gas strip has gone from just under $6 in the fall to $3.50 currently, and that will alleviate some customer bill pressure for sure, so we'd love to hear [management] teams quantify it."

CreditSights noted earlier in January that the ratios of several utilities' funds-from-operations-to-debt are trending positive and many utilities are maintaining stable EPS estimates, making regulatory pushback against recovering sky-high commodity prices "manageable."

M&A hits the brakes?

After a big year in the sector for gas utility dealmaking and minority stake sales, Mizuho said in a Jan. 9 note that rising interest rates have dampened private equity firms' interest in acquiring utility assets amid a "cooling off period" for such transactions.

That could prompt companies like Black Hills Corp. to reconsider plans to shop a minority interest in its gas utilities to fund equity needs, eliminating a popular avenue for many utility holding companies looking to mitigate commodity and interest costs.

Dominion executives told analysts and investors in November 2022 that they would provide updates on its business review in early 2023, but CreditSights' DeVries believes that it is still "too early" for any sort of asset sale announcement, which could involve its Utah gas distribution business.

Guggenheim Securities LLC, on the other hand, told clients Jan. 23 that Dominion "has been actively marking-to-market different parts of its portfolio for some time."

"Our latest meetings gave us the impression that management sees several options at its disposal depending on the scale of the required balance sheet repair," including unloading renewable natural gas development partnerships, a 1-GW solar and energy storage expansion pipeline, the 2,097-MW Millstone nuclear plant, its remaining 50% stake in the Cove Point LNG export plant, and full or partial stakes in its gas and electric operating companies.

American Electric Power Co. Inc., PG&E Corp., Duke, NiSource Inc. and FirstEnergy Corp. are also exploring asset sales with a focus on streamlining their portfolios or strengthening the balance sheet.

However, PG&E Corp. subsidiary Pacific Gas and Electric Co.'s bid to spin off 5.6 GW of non-nuclear generation assets into a separate company and potentially sell a minority stake is running into resistance at the Federal Energy Regulatory Commission after protests filed by the city of Santa Clara, the California Community Choice Association, and Public Citizen raised regulatory and consumer protection concerns.

Earnings beats, misses

Among large electric utilities, only Southern, Exelon Corp. Edison International, Entergy Corp. and Avangrid Inc. are expected to record fourth-quarter 2022 EPS declines compared to the prior-year quarter, according to an S&P Global Market Intelligence analysis of S&P Capital IQ consensus estimates. Revenues for six of the 15 largest U.S. and Canadian electric utilities by market cap are expected to come in higher than actual results a year ago.

Edison International in November 2022 raised its estimated losses for wildfire and mudslide disasters in 2017 and 2018 by $880 million to $8.8 billion, while subsidiary Southern California Edison Co. experienced customer outages during Jan. 9 and 10 winter storms.

All but Avangrid, Constellation Energy Corp. and Fortis Inc. are predicted to report lower EPS than in the third quarter of 2022, the analysis shows.

FirstEnergy, which is expected to beat year-over-year EPS and revenues, is Guggenheim's top stock pick for 2023 due in part to "a noticeable valuation discount to peers, which conflicts with its top-tier EPS growth (where we do not see material risk to the downside as with several other peers)."

For the fourth quarter of 2022, NextEra on Jan. 25 reported adjusted earnings of about $1.01 billion, or 51 cents per share, beating analyst estimates. Management noted during a same-day conference call that subsidiary Florida Power & Light Co. recently asked the Florida Public Service Commission for authorization to recover about $2.1 billion of "incremental fuel costs incurred in 2022."

Xcel Energy Inc. on Jan. 26 reported fourth-quarter net income of $379 million, or 69 cents per share, compared with $315 million, or 58 cents per share, in the fourth quarter of 2021. Those results topped the S&P Capital IQ GAAP consensus estimate of 67 cents per share for the fourth quarter of 2022.

Of North American multi-utilities, Sempra, Consolidated Edison Inc., Public Service Enterprise Group Inc., CenterPoint Energy Inc., Canadian Utilities Ltd. and Algonquin Power & Utilities Corp. are forecast to report lower EPS compared to the fourth quarter of 2021. Consolidated Edison, Public Service Enterprise Group and CenterPoint are also expected to record lower EPS than in the third quarter of 2022.

Algonquin saw its stock price plummet in mid-November 2022 after it disclosed an additional third-quarter interest rate expense of $23.3 million and cut 2022 earnings guidance. Shares of the Ontario-headquartered company fell again Jan. 12 after it outlined plans to lower its dividend and cut capital expenditures and provided below-consensus earnings guidance for 2023. Algonquin is targeting $1 billion of additional asset sales in 2023 to shore up its balance sheet.

Eight of the 15 largest multi-utilities will see revenues grow year-over-year, according to consensus analyst estimates.

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