Stable outlook for US public power utilities in 2014

Moody’s

The outlook for the U.S. public power sector remains stable, given the utilities’ unregulated ability to set retail electricity rates at levels that maintain sound debt service coverage and liquidity, as well as their ability to adapt to changing customer demand, says Moody’s Investors Service in the report “2014 Outlook – US Public Power Electric Utilities.”

Rising costs tied to environmental compliance and the transition to cleaner power sources, however, continue to pose long-term risks.

Moody’s expects the liquidity and leverage ratios of the public power utilities to improve modestly in 2014. Relatively stable business conditions, a slowly improving economy and low natural gas prices will continue to temper increases in electricity rates.

Customer demand for electricity has been tracking the slow improvement in the economy. Slower growth in customer demand will make it harder for utilities to spread costs over a large customer base; however, it also will delay the need to finance new energy and capacity to meet growth, moderating debt ratios.

The risks to the sector’s stability are longer-term and mainly tied to environmental compliance.

“Greater carbon regulation and advances in technology that threaten the monopoly utilities have on customers are long-term credit risks,” said Dan Aschenbach, a Moody’s senior vice president. “The more the pace of change accelerates, the greater the credit pressure on public power utilities and the need for them to adapt.”

Moody’s continues to view climate change policy as one of the most significant uncertainties because of the estimated cost it will impose on coal-fired generation and, in turn, be passed on to ratepayers.

The Environmental Protection Agency, for instance, recently announced carbon emissions output standards for new coal-fired power plants that likely would lead to a halt in building new coal-fired generation units.  

A lesser risk facing the industry arises from changes in the power markets, as regional energy and capacity markets continue to move toward integration. These add a layer of uncertainty about the cost recovery on the newest coal-fired generation assets.

The outlook expresses Moody’s expectations for the fundamental business conditions in the public power utilities over the next 12 to 18 months.

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