Public power credit outlook is stable, but challenges loom, rating agencies tell conference
Originally published June 18, 2014
The credit outlook for the public power sector is stable, executives with the three major credit rating agencies agreed at a June 16 session at APPA’s National Conference. However, Dan Aschenbach of Moody’s Investors Service, Jeffrey Panger of Standard & Poor’s and Dennis Pidherny of Fitch Ratings all discussed challenges facing the utility industry.
The Environmental Protection Agency rules will be a challenge, all three analysts said. Public power utilities have managed the costs fairly well so far, but the verdict is out on EPA’s proposed carbon dioxide rule for existing power plants, Panger said. It’s all about the costs, Pidherny said. Based on an estimated impact that translates to $10 per ton of carbon dioxide, the rule would produce a nationwide six percent rate increase, he said—but regions could see increases ranging from around zero to 39 percent. About 30 public power utilities have generation portfolios with 56 percent to 100 percent coal, Aschenbach said. Fitch’s concern is that utilities will be saddled with stranded costs, Pidherny said.
Distributed generation is not a risk today, but utilities need to be prepared for the possibility that customers in droves will find ways off the grid, Aschenbach said. Public power utilities have been good in the past at planning for these types of changes, he added. "Adaption to change remains of paramount importance."
Public power utilities have been fairly resilient in weathering the problems caused by the sluggish economy and reduced demand, Panger said. Lower consumption is here to stay, Pidherny said.
Volatility in fuel and purchased power costs is another challenger, Panger said. Natural gas prices are expected to remain low for the next few years, all three analysts agreed. Over the longer term, S&P expects natural gas volatility to return. "The key is whether management is willing to respond in a timely manner," Panger said.
The credit outlook for public power is driven by financial metrics, Aschenbach said. "The stronger the debt service coverage, the higher the rating," he said, adding that also holds true with liquidity.
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