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Mild winter handicaps gas utilities as coronavirus impacts ramp up

A mild winter sapped earnings for many natural gas utilities in the first quarter of 2020, just as the companies started bracing for the impacts of COVID-19.

Gas distribution companies across the nation highlighted warmer-than-normal winter temperatures in first-quarter earnings calls, as they sought to explain slumping volumes and revenues during a period that typically accounts for much of the year's gas demand. Nationwide, heating degree days, when consumers can be expected to turn up thermostats, were 14% below first-quarter 2019 levels and 10% lower than usual.

Executives said the mild winter impacts outweighed the COVID-19 fallout, but many acknowledged that the overlap of unfavorable weather and falling gas demand related to the pandemic has set up challenges for 2020.

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Leaders at New England multiutility Eversource Energy were clear that warm temperatures were the cause of a nearly 14% drop in its gas utility sales from the year-ago period.

"I'd say 95% of those numbers are due to the incredibly mild weather we had in the first quarter — it's nothing to do with real COVID impacts," Eversource Executive Vice President and CFO Philip Lembo said on a quarterly conference call. "The heating degree days were the lowest in 50 years. That's five-zero. They were about 18% or 19% below the previous year and below normal."

Many utilities like Eversource take advantage of regulatory mechanisms like revenue decoupling and weather normalization adjustments, or WNAs, allowing them to apply a surcharge on customer bills to offset impacts from mild winters. But weather can still negatively impact revenue and margins even with WNAs in place. Their effectiveness can vary based on their design, and extremely cold or warm days can leave companies with some exposure to impacts. The adjustments also may not apply to all customer classes, including manufacturing and commercial ratepayers.

St. Louis-based Spire Inc. said Missouri's new Weather Normalization Adjustment Rider proved ineffective at offsetting the mild winter, in part because the mechanism did not cover industrial and small commercial customers. The company estimated the WNA's shortcomings led to roughly $7 million in negative earnings impact and contributed to a year-over-year drop in net economic earnings during its fiscal second quarter.

Spire Executive Vice President and CFO Steven Rasche said that in the back half of 2020 the company would have to look for ways to offset first-quarter earnings headwinds, even as it anticipated further profit pressure from coronavirus-related costs and expenses.

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DTE Energy Co., which distributes gas in Michigan, said it was facing $60 million in earnings pressure this year, as the coronavirus weighs on electric power demand but also due to the mild winter. The company said weather impacts largely drove a $30 million year-over-year drop in gas utility operating earnings. DTE is looking for $120 million to $130 million in savings to offset that pressure and prepare for additional headwinds, including the potential for a cool summer and warm fall.

"Overall, we have been presented with some significant challenges in the first quarter related to warmer-than-normal weather and the emergence of the COVID-19 pandemic," DTE President, CEO and Director Jerry Norcia said on the company's conference call.

Unitil Corp., another New England gas distributor, reported quarterly earnings per share reduced by 20 cents from a year ago and shrank its potential return on equity over the last 12 months. Unitil has revenue decoupling mechanisms in place in Massachusetts, but not in New Hampshire and Maine. Unitil Chairman, President and CEO Thomas Meissner said the company will file for electric power and gas decoupling mechanisms in New Hampshire and will strongly consider them in Maine.

For some companies, the weather put a damper on otherwise solid quarterly results. Black Hills Corp., which distributes gas in eight states from Arkansas to Wyoming, saw gas utility gross margins increase by $1.6 million due to new rates and customer growth, but unfavorable weather largely offset the gain. The mild temperatures, as well as possible COVID-19 impacts throughout the year, led the company to revise its 2020 earnings guidance to $3.45-$3.65 per share, down 10 cents at both ends of the range.

The warm temperatures also affected non-regulated business segments for some gas utility operators. New Jersey Resources Corp. partly blamed the mild winter for a disappointing quarter at NJR Energy Services Co., which provides wholesale natural gas and energy management services.