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US utilities expected to see 'muted impact' from COVID-19 in Q1'20 results

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US utilities expected to see 'muted impact' from COVID-19 in Q1'20 results

Wall Street anticipates that investor-owned utilities' first-quarter results will be mostly insulated from a material impact tied to the COVID-19 pandemic and a potential recession.

Most investors expect a "fairly muted impact to profitability of utilities" and some decline in volume, but the financial ramifications will not be burdensome, John Bartlett, portfolio manager and electric utility analyst at Reaves Asset Management, said in an April 16 phone interview.

The U.S. utility sector remains a broadly defensive industry, and companies have spent the past several weeks publicly reassuring the investment community that they are prepared to weather the financial fallout from the pandemic.

"By and large, I think the group is really enjoying the support of investors because people are pretty comfortable with the fact that earnings power is going to remain in place," Bartlett said. "Even though they might have a bit of a setback in this year's earnings, dividends are still going to go up and the earnings growth trajectory … is going to continue onward and upward."

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NextEra Energy Inc. was the first major investor-owned electric utility to report first-quarter earnings on April 22, reporting adjusted earnings of $1.17 billion, or $2.38 per share, in the first quarter of 2020, up 8% year over year. NextEra executives assured analysts that the utility was well-positioned to endure COVID-19 and expects to meet all financial expectations, including EPS guidance through 2022.

Utilities will likely report a decline in energy consumption due to "the one-two punch" of the virus-related economic shutdowns and a mild winter, Scotia Capital (USA) Inc. analyst Andrew Weisel said in an April 21 note. In addition, higher residential sales will not fully offset lower commercial and industrial volumes, but Weisel believes there is "little reason" for utilities, such as Consolidated Edison Inc., DTE Energy Co. and FirstEnergy Corp., to change long-term EPS estimates right now compared to other sectors.

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CreditSights, meanwhile, said that "while industrial sales are more vulnerable during economic events, they rarely translate into a big move in earnings as they are not high margin customers like residential customers are."

"In theory, a small portion of this decline in industrial demand could also be offset by incremental residential demand as more individuals are at home and/or working remotely throughout this time," CreditSights analyst Andrew DeVries wrote in an April 17 report, noting that Entergy Corp., FirstEnergy, Berkshire Hathaway Energy and American Electric Power Co. Inc. are seen as the utilities with the "greatest exposure to industrial demand" based on the percentage of 2019 total MWh sales volumes.

"We are cognizant of the bad debt and commercial/industrial load impacts but still view utilities as positioned very well to the overall market," DeVries added.

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With most utility calls scheduled for May, Guggenheim Securities LLC analyst Shahriar Pourreza said he expects management teams to have more details on the impact of the virus on their businesses, especially electricity demand. Ideally, utilities would give more accurate sensitivities related to the interplay between a drop in C&I demand and an increase in residential demand, and disclosures around which C&I customers utilities see as necessities from an earnings standpoint.

That said, he does not expect utilities to change EPS ranges or financial guidance until the end of the second quarter, when companies may have more clarity on the pandemic's effects.

"Usually, to be honest with you, second quarter historically is too early as well because your bread and butter is really the third-quarter summer cooling, right? That's usually when utilities make most of their money," Pourreza said in an April 21 interview. "But in this case, COVID-19 may be such a problem that they may be pushed to give guidance sooner than later versus traditional third quarter or year-end results."