After dealing with the gut punch of the COVID-19 pandemic and economic shutdown at the end of the first quarter, utility management teams and Wall Street have been bracing for more of a knockout blow in the second quarter.
But with temperatures rising and states reopening their economies, the impact to earnings and utility balance sheets could be softer than previously expected.
Several U.S. electric and multi-utilities are expected to report second-quarter 2020 earnings higher than the previous quarter and year-over-year results, with the mean estimate for the bulk of the sector still lower than the first quarter, according to an S&P Global Market Intelligence analysis. Seven of the 15 electric utilities in the analysis are expected to report an increase in revenue versus the first quarter of 2020, though nearly all multi-utilities are expected to report a drop in quarter-over-quarter revenue.
"While the impacts of COVID-19 will be a wildcard, we aren't particularly worried about companies' abilities to deliver on [full-year 2020] EPS guidance for several reasons," Scotia Capital (USA) Inc. analyst Andrew Weisel wrote in a July 23 research report. These factors include companies "aggressively identifying" cuts in operations and maintenance expenses; states reopening their economies sooner than expected; state regulatory support and protections from COVID-19 pressures; and "favorable summer weather" that will help boost electricity demand.
"For these reasons, we also don't expect material capex cuts for any companies, and may instead see increases for some," Weisel wrote, pointing to American Electric Power Co. Inc. adding the North Central Wind projects, totaling nearly 1,500 MW in Oklahoma, to its capital outlook.
"We're hopeful that the quarter will be boring, with only modest stock price reactions," Weisel wrote.
DTE Energy Co. is the firm's "top pick" going into the second-quarter 2020 earnings season.
The typically defensive utility sector began to feel the impact of the COVID-19-related load declines in April, coupled with service disconnection moratoriums.
"It seems clear to us that the trough in demand related to COVID-19 will be reflected in 2Q earnings, with April bearing the brunt of the drop followed by the gradual improvements in May and June," Weisel wrote. "We're optimistic that the various forward-looking 'worst-case' demand scenarios spelled out during 1Q20 earnings updates will be avoided, thanks to the recovery of the economy to date (though states taking steps backwards may offset some of that)."
Analysts pointed out that several utilities have a wide variety of regulatory mechanisms and support in place to offset or mitigate certain revenue impacts tied to prohibitions on service disconnections and related cost recovery.
"All eyes will be on bad debt," CreditSights analyst Andrew DeVries told S&P Global Market Intelligence. "[H]ow many customers haven't paid their bills? How many have started to repay their bills and, most importantly, what is the regulatory recovery of that bad debt? Do they have to file a rider? Does the bad debt expense automatically go into rate base? Is there another mechanism?"
The analyst added bad debt expense "could be an issue" for certain companies "on the edge of their [funds from operations] targets," such as FirstEnergy Corp. and PPL Corp., "but generally we don't have many concerns here from a credit view."
"[O]bviously we will be looking at any changes to long-term FFO targets," DeVries added.
As far as specific companies, analysts and investors could zero in on FirstEnergy's alleged role in a high-profile Ohio bribery case linked to the state's nuclear subsidy law.
FirstEnergy, which has received subpoenas tied to the investigation, will hold its second-quarter 2020 earnings call at 10 a.m. ET on July 24 and it's not clear whether management will address the corruption probe.
Ohio House Democrats on July 22 announced plans to introduce legislation that would repeal the nuclear subsidy law. However, Gov. Mike DeWine, a Republican, and other top Republicans in the Ohio Legislature still support the measure.
DTE Energy could be pressed on the future of its midstream business given recent market concerns and Dominion Energy Inc.'s decision to sell its natural gas transmission and storage business to Berkshire Hathaway Energy.
"All eyes will be on DTE as Dominion getting out of midstream is clearly going to generate numerous questions to DTE management about the value they see there," CreditSights analyst DeVries said.
The analyst added DTE was getting questions about its midstream business before Dominion struck the deal with Warren Buffett's energy company, "so this quarter we expect even more questions on this topic."
"While we've long been bulled-up on DTE, it's also our top pick going into earnings," Scotia Capital analyst Weisel wrote. "Despite the obvious headwinds from COVID-19 and [Michigan's] spike in unemployment, we see the company as well positioned to raise 2020 EPS guidance, which would be the sixth consecutive year of increasing guidance with [second-quarter] results."
The analyst pointed to the midstream business "trending better than budgeted" year-to-date as one of the reasons behind DTE's potential to raise earnings guidance. DTE's earnings call is scheduled for July 28.