Renewables

Unregulated U.S. Utility Sector to See Downturn in 2016, Moody's Warns 

Falling power and gas prices will impact the operating cash flows of unregulated U.S. utilities in 2016, but regulated utilities will see a more stable outlook owing to a supportive regulatory environment, Moody’s Investors Service said in a new analysis of fundamental business conditions released on Nov. 6.

Moody’s changed its 2016 industry outlook for U.S. unregulated power utilities to negative, saying entities with coal and nuclear plants “are under additional stress.” Utilities with mostly gas-fired power plants will likely fare better as “fuel costs fall with revenue.” However, the credit ratings service expects that the entire market will be hampered by weaker demand growth due to energy conservation efforts and a tepid economy.

“A significant decline in gas prices in late 2014 that continued into 2015 brought down power prices in all deregulated markets except for PJM, which is by far the largest in the US,” says Moody’s Vice President-Senior Credit Officer Toby Shea. “But as more new gas plants enter the market, the potential for a sustained decline in PJM’s all-in power prices is driving our negative outlook.”

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, Moody’s explained.

On the other hand, regulators will enable regulated utilities to recover costs and maintain steady cash flows. For 2016, the ratio of cash flow to debt is expected to be roughly 21% on average for the industry, according to the report, “2016 Outlook—US Regulated Utilities.”

The agency also noted that several utilities are increasingly using holding companies as leverage to drive returns. However, Moody’s views this as a credit negative because “an increase in parent leverage could have negative implications for the consolidated, corporate family.”

Meanwhile, 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 from widespread adoption of wind and solar power and other renewables energy,” it said.

Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)

 

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