As COVID-19 issues wound their way through first quarter utility earnings calls and projections for the remainder of 2020 and beyond, the 2019-2020 winter heating season drew to a close on a chilly note. Heating degree days, or HDDs, nationwide during April were 29% greater than those in April 2019 and 16% above the monthly norm.
As seen in the table and map below and attached tables, regional variations existed last month, with the South Atlantic, East South Central, and Middle Atlantic experiencing particularly cold weather relative to April 2019. Florida was the lone hot spot in the nation, with HDDs 50% below year-ago levels.
Almost all covered gas utilities have substantially protected their revenues and earnings from the variability that results from abnormal weather through implementation of regulator-approved clauses and mechanisms. When these mechanisms are implemented in a symmetrical manner for both colder and warmer weather, there should be little difference in the revenues collected by a utility compared with those authorized based on normal weather in its last general rate proceeding. Recall that 2019 finished on a mild note, with fourth-quarter HDDs 2% lower year over year. Despite the lackluster start to winter, adjusted earnings for the companies in the RRA utility universe were up 13.2% in the fourth quarter of 2019 compared with the fourth quarter of 2018. For full-year 2019, EPS for the utility group were up 4% on average. Based on S&P Global Market Intelligence consensus estimates, EPS are projected to grow 5% in 2020.
Despite the increased use of such regulatory mechanisms, the lackluster winter weather and broad decline will not help the profit outlook for the group, especially for those companies with exposure to gas exploration and production activities, having felt the squeeze from the pandemic-stalled economy.
Additionally, very much at issue will be the negative impact on the U.S. economy and utilities specifically of the coronavirus pandemic. Based on current S&P Global Market Intelligence consensus estimates, which are likely to be trimmed in the coming months, so far few, if any, companies in our coverage universe have altered guidance for 2020 EPS or their longer-term profit growth goals. Likewise, analyst profit expectations remain relatively unchanged over the past month.
However, as events unfold in coming weeks and as companies release first-quarter data, some pronouncements are likely to be made regarding both earnings outlooks and capital spending, as projects are interrupted by supply-chain impediments, labor issues and near-term demand reductions. While difficult to forecast future events, it is not unreasonable to expect that 2020 EPS growth assumptions could be in the low-single-digit range for the group once all companies have reported first-quarter results.
It appears logical that first-half 2020 EPS results for companies will experience contracted profits, most especially as sales to industrial and commercial customers are under pressure. Regarding the second half of 2020 and beyond, much will be dependent on the location and pace of the restart of the US economy, clouded by a possible second wave of virus activity as has been forecast by some sources. Looking ahead to the upcoming summer air conditioning season, recall that last year’s third quarter was 8% above normal on a nationwide basis.
Under normal weather conditions, the first quarter of a year accounts for about one-half of annual HDDs, with the fourth quarter accounting for roughly one-third. Regarding the magnitude of contribution by cooling degree days, the third quarter is the most important, followed by the second quarter.
Loads and markets
With the exception of a small uptick in the Electric Reliability Council Of Texas Inc., average loads continued to decline across U.S. power markets last month as below-normal heating demand and coronavirus measures kept demand in check. The number of HDDs was as much as 42 degree days below normal each week in March nationwide
On a quarterly basis, average load in ERCOT rose 0.7% to 39 GW year over year, while around-the-clock prices fell 11% to $23.18/MWh. The steepest declines in power demand in the first quarter were observed in PJM Interconnection, with average and peak loads down 9% and 18.8%, respectively, and in New York ISO, which saw average and peak demand decline by 9% and 13.4% quarter over quarter.
Grid operators have been monitoring impacts to electricity demand, with certain markets seeing more pronounced drops in load compared to expectations. On March 25, NYISO said it observed a 2% decline in daily peak energy load relative to the norm at this time of the year, according to its blog.
On March 23, the Midcontinent ISO reported its peak energy use in March to-date was 18% below levels from the same period in 2019. Market Intelligence data shows a similar 18.4% drop in peak load year over year. Other markets have seen smaller shifts in average hourly and peak loads year to year. The California ISO average hourly load in March fell 1.1%, and peak load was down 0.3%. For additional detail, see the April 3 Market Intelligence news article.
ENSO forecast stays neutral
According to El Niño Southern Oscillation, or ENSO, reports issued April 13, ENSO-neutral conditions remain in place. Equatorial sea surface temperatures are near to above average across much of the Pacific Ocean, and this pattern of anomalous convection and winds is generally consistent with ENSO-neutral conditions. The National Oceanic and Atmospheric Administration, or NOAA, looks for ENSO-neutral conditions to continue through the spring and targets a 60% probability that similar conditions will continue through the Northern Hemisphere summer 2020 and “most likely” extending through the fall.
A cooling degree day is created for each degree that the mean daily temperature exceeds 65 degrees Fahrenheit, and a heating degree day similarly reflects below-65 degree temperatures. The data included in this report is based on population-weighted data collected by the NOAA/U.S. Department of Commerce. The "normal" data is computed by S&P Global Market Intelligence to be a 15-year average updated each month. We believe this 15 year normal is more representative of current weather trends and will reflect recent climate changes.
Regulatory Research Associates is a group within S&P Global Market Intelligence.
For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Global Market Intelligence Energy Research Library.