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Warm weather, residential power sales help utilities offset demand declines

As the COVID-19 pandemic prompts fresh concerns about a prolonged economic recovery, electric utilities have thus far been able to mitigate related sales declines.

An S&P Global Market Intelligence analysis of second-quarter 2020 earnings calls shows utilities experiencing hits to power demand by the commercial and industrial customer segments have largely managed to offset declines in the early months of the coronavirus pandemic through higher residential retail electric sales and warmer weather. While major questions about public health and the strength of the economy loom over the second half of 2020, even those utilities that experienced large demand declines in April saw power sales improve in subsequent months.

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

Dominion Energy Inc. subsidiary Dominion Energy Virginia, which serves Virginia and North Carolina, reported a slight uptick in summer weather-normalized retail sales on average compared to the past two years, after a slight drop in May. The utility, known legally as Virginia Electric and Power Co., actually saw year-over-year residential load increase by about 3% in April.

"Strong residential and data center demand continues to support overall load levels that modestly exceed the historic average," Dominion Executive Vice President, CFO and Treasurer James Chapman said on the company's July 31 earnings call.

Guggenheim Securities LLC analyst Shahriar Pourreza said data centers, which comprise about 30% of Dominion Energy Virginia's commercial volumes, are "driving the resiliency."

"[Dominion Energy Virginia] is showing strong volumes despite COVID-19 and [Dominion Energy South Carolina Inc.] volumes are starting to show some return to normalcy," Pourreza wrote in a July 31 report.

Dominion Energy South Carolina reported weather-normalized load declines of nearly 10% in April versus the prior two-year average "with July demand only 1% off weather-normal historic averages," Dominion's CFO said.

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The U.S. Energy Information Administration in its July short-term energy outlook forecast a 4.2% decline in electricity consumption in 2020 compared to 2019. The EIA now predicts a 7% commercial sector demand decline and 5.6% drop in industrial load.

Stronger-than-expected industrial load growth in high-tech industries is offsetting a decline in commercial sales for some utilities in the Northwest region of the country.

With a customer base that includes a cluster of high-tech companies nicknamed "Silicon Forest," Portland General Electric Co. revised 2020 guidance to reflect flat energy deliveries, weather adjusted, year over year. That is up from an earlier projected decrease of 1% to 2%.

"Industrial deliveries increased 3% on a weather-adjusted basis as our digital services and high-tech manufacturing customers continue their long term-trend of steady growth despite the pandemic," President, CEO and Director Maria Pope told investors and analysts July 31.

Portland General's residential load increased 7% on a weather-adjusted basis compared to the same quarter in 2019 and industrial deliveries increased 3%. Commercial load declined 16% as retail businesses, restaurants and government buildings closed due to the pandemic.

Eversource Energy has attributed high electric bills for customers in Connecticut to a significant increase in residential usage.

Eversource reported residential kilowatt-hour sales were 26% higher year over year in June. Eversource Executive Vice President, CFO and Treasurer Philip Lembo said the surge in usage drove about 85% or more of the monthly bill increases, which some state lawmakers are seeking to suspend.

For FirstEnergy Corp., management reminded analysts and investors that about 65% of its base distribution revenues are tied to residential sales with about 28% coming from commercial customers and 7% from the industrial sector.

"As a result, what we told you in April has borne out through this quarter," FirstEnergy CEO Charles Jones Jr. said on the company's July 24 earnings call. "While weather-adjusted load dropped by almost 4% system-wide compared to the second quarter of 2019, the increase in residential revenues related to the stay-at-home orders in our service territory more than offset the decreases in the commercial and industrial sectors."

Southern Co., which maintained 2020 retail sales projections, expects an overall decline between 2% to 5% on a weather-normal basis.

"Retail sales in these ranges would lower total nonfuel electric revenues by approximately $250 million to $400 million on a consolidated basis," Executive Vice President and CFO Andrew Evans said on the call.

Southern's retail load projection for the third quarter of 2020 is expected to be similar to the second quarter, representing a smaller overall percentage. "That's simply because the summer period has a much higher sustained output of kilowatt-hour sales, given that it's a cooling load," Evans said.

Despite COVID-19's impact on retail revenues registering as lower than expected, with favorable operations and maintenance trends a key variable in the second quarter, "much uncertainty remains for the remainder of 2020," Southern said.

Michigan sales recovering

CMS Energy Corp. is forecasting an overall electric sales drop of up to 6% in 2020, aided by a 5% increase in residential sales, with management indicating a phased reopening of Michigan's economy has helped commercial and industrial sales recover from the decline they saw at the start of the pandemic. In April, CMS Energy executives said demand was down about 10%, with a drop of up to 25% from commercial and industrial customers partially offset by residential sales.

"So, our residential sales have remained elevated, while commercial and industrial sales are starting to return to their pre-pandemic levels," CMS Energy Executive Vice President and CFO Rejji Hayes told analysts and investors, adding that "every 1% change in residential sales equates to over 3 cents of [earnings per share] impact on a full-year basis."

Scotia Capital (USA) Inc. analyst Andrew Weisel said CMS Energy has shown "incredible cost controls" during the current economic downturn and Guggenheim's Pourreza noted that the second quarter "continues to surprise to the upside."

Detroit-headquartered DTE Energy Co.'s most recent smart meter data shows that commercial and industrial sales have returned to about 90% and 95%, respectively, of pre-COVID-19 budgeted levels.

"Our electric load recovery is tracking better than we forecasted across all customer classes," President and CEO Jerry Norcia said, adding "weather has provided a strong tailwind."

Meanwhile, independent power producers with ample residential retail customers could enjoy a bigger revenue boost.

NRG Energy Inc. benefitted from "strong mass retail load as a result of stay-at-home restrictions," President and CEO Mauricio Gutierrez said on a July 24 investor call.

NRG reported $574 million of adjusted EBITDA in the second quarter, "22% higher than the same period last year."