VIDEO: Unregulated utilities outlook negative, regulated utilities stable

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Moody’s Investors Service revised its industry outlook for fundamental business conditions in 2016 for the U.S. unregulated power and utilities sector to negative, citing declining prices for power and natural gas.

At the same time Moody’s posted a stable industry outlook for U.S. regulated utilities in 2016, underpinned by a continued expectation of a supportive regulatory environment.

Unregulated utilities with coal and nuclear power plants are under additional stress, as falling power and gas prices will impact their operating cash flow, according to the report, “2016 Outlook — U.S. Unregulated Power and Utilities.”

Utilities with mostly gas-fired plants will fare better as fuel costs fall with revenue, but the entire market is hampered by weaker demand growth due to energy conservation efforts and a tepid economy.

“Gas prices experienced a large drop of more than $1/MMBtu in late 2014, which continued into 2015 and brought down power prices in all deregulated markets except PJM, by far the largest in the U.S.,” says Moody’s Vice President-Senior Credit Officer Toby Shea. “PJM‘s power prices are currently held up by coal-fired generators, but we do not believe this to be sustainable as more new gas plants enter the market.

While baseload coal and nuclear generators in PJM will benefit from higher capacity prices related to the capacity performance product starting in 2016, the gains are insufficient to offset the larger drop in wholesale power prices.

For regulated utilities, the stable outlook affirms Moody’s expectation that regulators will continue enabling utilities to recover costs and maintain steady cash flows. For 2016, the ratio of cash flow to debt is expected to be roughly 21 percent on average for the industry, according to the report, “2016 Outlook — U.S. Regulated Utilities.”

While not a primary driver of the U.S. regulated industry outlook, several U.S. utilities are increasingly using holding company leverage to drive returns, a credit negative. An increase in parent leverage could have negative implications for the consolidated, corporate family.

“We are finding that utility holding companies are increasingly using parent debt to finance M&A deals. Several recent acquisitions include the use of significant leverage at the parent as part of the acquisition financing,” says Moody’s Vice President-Senior Analyst Jeffrey Cassella. “As a result, we have taken negative rating actions on the parent’s rating or outlook.”

Regulated utilities have taken a credit positive step in working with regulators to revamp their rate design and remain ahead of the potential industry transformation associated with widespread adoption of wind, solar and other renewable energy.

Moody’s outlooks reflect the rating agency’s expectations for the fundamental business conditions in the industry over the next 12 to 18 months.

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