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The outlook for fundamental business conditions in 2015 is stable for both U.S. regulated utilities and the unregulated power companies, according to Moody’s Investors Service.
For the unregulated power sector, the key to the stable outlook is Moody’s view that natural gas prices have stabilized, although at low levels. The stable pricing will create weak but stable business conditions for the industry.
Natural gas prices often set prices for electricity in the wholesale market. Moody’s expects the Henry Hub price of natural gas for delivery in 2015 to be in the $3.50/MMBtu – $4.50/MMBtu range, ending a multiyear slide in natural gas prices from the glut of gas from shale drilling in the U.S.
At these low but stable levels, it is hard for most coal and nuclear plants to generate free cash flow, says Moody’s, and many coal plants are shutting down. The trend is starting to narrow reserve margins—how much power over demand existing plants on a grid can produce—in most wholesale U.S. power markets.
“Along with our expectations for a stable price range for natural gas, tighter reserve margins also support our stable outlook because they bolster the potential for higher power prices,” says Vice President – Senior Analyst Toby Shea.
For the regulated utilities, the stable outlook captures Moody’s expectation that regulators will continue to support utilities to recover costs and maintain stable cash flows, leading to a ratio of cash flow from operations to debt that remains close to a 20 percent average for the industry.
Moody’s also expects a decline in capital spending among the regulated utilities in 2015 as the wave of spending for environmental compliance reasons has for the most part been completed. Consequently, the industry will have less need to borrow to finance capital spending for the next two years, a credit positive.
Although not a material driver of the stable outlook of the regulated segment, Moody’s expects financial engineering in the form of increased holding company debt, acquisitions at high multiples, yieldcos and master limited partnerships to continue to be implemented in the sector in 2015. These developments will, most likely, increase leverage throughout the corporate family.
“However, these endeavors will be limited, with credit implications primarily affecting holding companies that make these strategic decisions, as utility operating subsidiaries are increasingly becoming more insulated through ring-fence provisions,” says Moody’s Ryan Wobbrock, an Assistant Vice President and Analyst.
Moody’s outlooks reflect the rating agencies expectations for the fundamental business conditions in the industry over the next 12 – 18 months.