S&P: Utility financials largely stable, growth outlook uncertain
- New research from S&P Global Ratings paints a stable picture of the utility sector's credit outlook, with both regulated providers and independent power producers likely to see low levels of growth next year.
- S&P concluded rating trends for North American regulated electric, gas, and water utilities "remain mostly stable," thanks in part to the current regulatory climate. But the research company also said financial conditions have weakened this year and only "modest financial improvement" is expected in 2019.
- For IPPs, S&P anticipates "modest to flat growth" next year and expressed optimism for higher power prices as market reforms appear likely in some areas.
An interrelated mix of energy efficiency, the growth of distributed resources and weak power prices have created challenges for regulated utilities and IPPs, but S&P analysts still see modest growth on the horizon — though they warn it will depend on execution and the strength of corporate financials.
For regulated utilities, S&P said ratings trends are "mostly stable reflecting generally supportive regulatory oversight." But U.S. tax reform, capital spending and flat to slightly negative load growth did not help the industry this year.
"In general, those utilities most affected by these developments were those who strategically operate with a minimal financial cushion at their current rating," S&P wrote. "We expect only modest financial improvement in 2019, reflecting somewhat improving margins partially offset by rising debt."
For IPPs, eight in 10 producers have stable ratings outlooks — up from less than 60% last year. But that improvement is not a result of fundamental market changes, and instead "mostly reflects capital structure corrections" as companies reduced debt.
"The business outlook still reflects demand slowdown because of energy efficiency and distributed generation," S&P concluded. "Energy margins remain under pressure as wind and solar generation has shaved off peak price formation."
The firm anticipates "modest to flat growth" next year for IPPs, predicting that power prices could strengthen in the PJM Interconnection market "because energy price reforms appear likely." Regulatory risks have declined for nuclear generators after court decisions upheld energy subsidies put in place by Illinois.
This fall, the U.S. Court of Appeals for the 7th Circuit ruled that the Illinois' Zero Emission Credit program did not interfere with federal oversight of wholesale power markets. With power prices under pressure from efficiency, cheap gas and renewables, nuclear plants in some markets have been losing money and advocates warn early closures would spike carbon emissions.
S&P's research echoes themes that Moody's Investor Services described in a recent credit ratings report.
Moody's said it believes utility holding company finances are generally stable, though the firm warned that is heavily dependent on the extent to which revenues are generated by regulated operations. Due to swings in commodity prices, the firm believes merchant generation and energy trading businesses have a significantly higher risk exposure.
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