The following post was written by Regulatory Research Associates, a group within S&P Global Market Intelligence. For further information on the full reports, please request a call.
The summer months of June, July, and August are typically the real money makers for electric utilities, and this year's summer is shaping up to continue that trend. The third quarter — comprising July, August, and September — usually accounts for nearly two-thirds of cooling degree days nationwide, with extreme heatwaves pushing residential and commercial air conditioning units into overdrive.
Nationwide, the third quarter has been hotter than normal since at least 2010. Third quarter CDDs increased 11% in 2015 and 14% in 2016. Last year's hotter-than-normal summer boosted third-quarter earnings for electric utility holding companies in the RRA Index by almost 13% over the year-ago period. But the magnitude by which utilities count on the third quarter to bolster financial results varies by company, operating territory, and regulatory decoupling mechanisms in place among other factors, according to an analysis by S&P Global Market Intelligence.
Two utility holding companies that operate in the Southwest, Pinnacle West Capital Corp. and El Paso Electric Co., have the most earnings exposure to the third quarter based on an analysis of revenue and operating cash flow from 2012 through 2016. Pinnacle West's third-quarter 2016 revenues accounted for more than a third of its total full year revenues, while El Paso's third-quarter 2016 revenue accounted for 36.4%. The mid-to-late summer quarter accounted for an even greater percentage of both companies' 2012-2016 operating cash flows, 37% and 48%, respectively. For the average RRA covered utility, the third quarter represented about 29% of revenues and 32% of cash flows in the 2012-2016 time frame.
When evaluating utility profitability, it is helpful to know that the third quarter is usually the most important in terms of profit contribution, the first quarter No. 2, the second quarter No. 3, and the fourth quarter No. 4. The table below shows the population-weighted norms of cooling and heating degree days for the U.S., and the percentages applicable to calendar-year quarters. Under normal weather conditions, the third quarter is the most important in terms of cooling degree days, with second quarter next. In terms of heating degree days, the first quarter accounts for about one-half of the annual norm, with fourth quarter next.Some utilities have the ability to offset wild temperature swings in operating territories through regulatory means. Around 11 states currently have weather-normalization clauses as a revenue decoupling mechanism for electric utilities that provide for rate adjustments when temperatures deviate from normal. Those states are primarily in New England and the mid-Atlantic, though California, Hawaii, Indiana, and Ohio also offer them to utilities. (See map below.)
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