Moody’s just published a special comment surrounding U.S. regulated utilities’ planned capital expenditures set to fall in 2015.
Industrywide capital spending to peak, then decline, but falling cash flows will counterbalance positive credit impact. Moody’s examined some 34 utility holding companies and observed 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 fall in spending will otherwise improve free cash flow (FCF), 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.
Completion of generation and environmental projects drives capital investing lower. Companies that are showing the greatest decline in capital expenditures from 2012 and 2015 include NextEra Energy (Baa1 stable), Cleco Corporation (Baa3 positive), Puget Energy (Ba1 positive) and Westar Energy (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 FCF, while Puget and Cleco have the potential to generate positive FCF.
As utilities wind down large capital spending programs, business risk will decline for many, but not all. For some companies, including Southern Company (Baa1 stable), SCANA (Baa3 stable) and Dominion Resources (Baa2 stable), high execution risk remains for large construction projects not expected to be completed until 2017-2019.
New environmental standards, among other factors, could cause capital spending to start rising again. 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 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.