Moody’s Investors Service examined about 34 utility holding companies and found that planned capital expenditures will peak at about $70 billion a year this year and next, before declining to $65 billion in 2015, as many utilities wrap up large projects.
The drop-off in spending will otherwise improve free cash flow, a credit positive because of the reduced requirements for debt financing. Also credit positive is the rate recovery associated with the completion of large projects. However, these positive credit impacts are counterbalanced by expected declining cash flows due to the expiration of tax benefits associated with bonus depreciation.
Companies showing the greatest decline in capital expenditures from 2012 and 2015 include NextEra Energy (rated by Moody’s as Baa1 stable), Cleco Corp. (Baa3 positive), Puget Sound Energy (Ba1 positive) and Westar (Baa2 stable).
For NextEra and Puget, this is related to the completion of large generation projects, whereas Cleco and Westar are finalizing installation of environmental upgrades to comply with Mercury Air Toxic Standards (MATS). All of these companies will show an improvement in free cash flow, while Puget and Cleco have the potential to generate positive free cash flow.
As utilities wrap up big projects, business risk will decline for some, but not all. For some companies, including Southern Co. (Baa1 stable), SCANA Corp. (Baa3 stable) and Dominion Resources (Baa2 stable), high execution risk remains for large construction projects not expected to be completed until 2017-19.
Moody’s outlook for capital expenditures does not include potential spending related to compliance with carbon emissions or other new environmental standards at existing power plants. However, for carbon, it looks like companies would not need to begin spending until after the standards are set in 2016 at the earliest.
Additional renewable energy and gas generation projects could be associated with implementation of new environmental standards at existing plants as well as a wave of increases in renewable portfolio standards (RPS) that could go into effect over the next several years.