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Small, midcap gas utilities raise more coronavirus concerns than larger peers

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Small, midcap gas utilities raise more coronavirus concerns than larger peers

Small and midsize natural gas utilities issued revenue, profit and capital spending warnings linked to the coronavirus outbreak, while their bigger peers largely shrugged off the pandemic's potential impacts on their gas business.

Utilities across the nation have suspended service shutoffs in the face of soaring unemployment and widespread financial hardship, raising concerns that unpaid bills will pile up and saddle gas distributors with bad debt. The economic downturn and stay-at-home orders also threaten to derail demand among industrial and commercial gas customers.

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But in the first week of quarterly earnings reports and conference calls, executives at gas utilities said they have not seen increases in accounts uncollectible that pose long-term financial concerns. Many companies reported they are working with state regulators to recoup coronavirus-related costs. Some have regulatory mechanisms in place to smooth revenue swings, and others are pursuing them.

Further softening the blow, the virus struck as gas distributors were shifting into the low-demand season when revenues are typically somewhat down.

"We feel comfortable entering the spring and summer months, which typically represent only 20% of annual demand," James Harbilas, CFO at international energy delivery company AltaGas Ltd. said on the company's April 30 conference call.

COVID-19 concerns concentrated among small and mid-cap utilities

Some utilities did adjust 2020 guidance or prepare investors for negative impacts from the pandemic.

National Fuel Gas Co. on May 1 cut capital spending plans at its gas utility serving western New York and Pennsylvania by roughly $10 million. The revision is due to the suspension of certain nonemergency, customer-facing capital work related to COVID-19, executives said.

The company has also seen a 5% to 10% drop in demand from large industrial customers. However, President and CEO David Bauer said the slump would not have a "dramatic impact" on earnings because industrial margin only accounts for about 10% of National Fuel's total margin.

ONE Gas Inc. also flagged industrial demand declines, noting that two of its top 40 transport customers — an automotive company and roof shingle manufacturer — temporarily suspended operations. Another 19 transport customers have also suspended or reduced activity across its Texas, Oklahoma and Kansas service territories, resulting in about $100,000 per month in lost revenues.

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However, One Gas also put the declines in context, noting that transport customers accounted for 12% of net margin in 2019. The company still warned investors that rising bad debt among residential customers could cause earnings to fall toward the low end of its guidance.

Executives at Unitil Corp., a small-cap New England multi-utility, said they had limited visibility into industrial and commercial demand destruction but were not optimistic on the issue. The company generates about half of its distribution revenue from industrial and commercial customers, so every 1% drop in their usage will reduce sales margin by roughly $400,000, CFO Laurence Brock said on an April 30 conference call.

Large-cap utilities take coronavirus in stride

Large-cap multi-utilities DTE Energy Co. and Southern Co. said they expected COVID-19 to have relatively little impact on their gas distribution businesses and were more concerned about their electric utilities.

DTE on April 28 detailed plans to build $120 million to $130 million in contingencies to more than offset $60 million of anticipated earnings pressure in 2020, largely because of a drop in electric power demand from industrial and commercial customers due to COVID-19. In contrast, DTE President and CEO Jerry Norcia only saw a "modest impact" to its gas utilities, noting that the company filed to defer virus-related costs in its ongoing gas rate case.

The Detroit-based company did pause work on its gas main renewal program. But DTE intends to restart work in May and ultimately replace 180 to 200 miles of leak-prone pipe this year, compared with 180 miles in 2019, Norcia said.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Southern Co. executives said their concerns about bad debt largely reside with their electric power business. Decoupling mechanisms, riders and trackers at many of the company's gas utilities will help protect them from bill nonpayment impacts, Southern CFO Andrew William Evans said.

In contrast to many companies, Southern sees industrial gas demand recovering ahead of commercial building consumption. President and CEO Thomas Fanning said low natural gas prices would support demand for feedstock gas in key regional industries such as chemicals manufacturing. He noted that states such as Alabama have put in place policies meant to preserve industrial load.

AltaGas reminded investors that 70% of its gas utility revenues have protection through fixed billing charges, decoupling and other tracking mechanisms. Executives said they do not see COVID-19 impacting their effort to expand their rate base and grow return on equity at Altagas' Washington, D.C.-area utility following the 2018 acquisition of WGL Holdings Inc.