Moody’s Gives Regulated Utilities a Negative Outlook for the First Time RSS Feed

Moody’s Gives Regulated Utilities a Negative Outlook for the First Time

The credit rating agency said tax reform pushed its regulated utility outlook into uncertain territory.

For the first time since it began rating sectors, Moody’s Investors Service has downgraded its overall outlook of the U.S. utility sector. The rating agency dropped credit from stable to negative for 24 utilities and from positive to stable for one utility, American Electric Power Company.

Moody’s said the change reflects uncertainties from the tax law changes passed in late December.

Jim Hempstead, a managing director at Moody’s, said the “action primarily applies to companies that already had limited cushion in their rating for deterioration in financial performance, will be incrementally impacted by changes in the tax law and where we now expect key credit metrics to be lower for longer.”

But the downgrade also indicates the challenges besetting the utility industry, which is coping with a swiftly changing electricity sector and falling demand in the U.S. Moody’s noted that utilities are spending more on resilience, “carbon transition” efforts and smart-grid changes than in the past.

Pacific Gas & Electric, which is at risk of bankruptcy because of liability for this year’s California wildfires, has also framed climate change as an obstacle for the utility’s future.

The January tax law changed the corporate tax rate from 35 percent to 21 percent, which has meant an influx of cash for most corporations. The cuts look like they give more money to utilities as well. But because of the lower tax rate, utilities will actually be collecting less money from customers and holding less money at a time.

Moody’s noted that since 2010, deferred taxes collected from customers has made up an average of 14 percent of funds from operations, or a utility’s incoming money. Moody’s now expects that through 2019 that amount will fall to 8 percent, leaving utilities with less immediate funds. Utilities’ ratio of cash flow to debt will also fall, which to financial rating institutions indicates less ability to pay off debt.

In its release on the downgrade, Moody’s said “this rating action primarily reflects the incremental cash flow shortfall caused by tax reform on projected financial metrics that were already weak, or were expected to become weak, given the existing rating for those companies.”

Most of the tax benefits stemming from the tax reform bill will flow directly through to customers. In the wake of its passage, nearly every state utility commission or regulated utility has said they would be working to pass any tax benefits through to ratepayers.

Read full article at GreenTech Media