Public power utilities in the United States are exhibiting strong financial trends and improving credit quality, according to a new report from Fitch Ratings.
The report, 2021 U.S. Public Power Peer Review, presents a variety of metrics, such as cash on hand, leverage, and debt service coverage, to gauge the financial health of the sector and compare performance across covered utilities as a whole and by classes.
“The latest peer review shows that modest ratios of capital investment to depreciation and improving coverage medians again contributed to low leverage and improving credit quality throughout the public power sector in 2020,” Dennis Pidherny, managing director of U.S. public finance at Fitch, said in a statement.
“These results are particularly surprising given the impact of the coronavirus outbreak and the related economic contraction,” Pidherny said. “They further illustrate the sector's operating and financial resilience, and its ability to record strong performance even through a very challenging period.”
Among the prominent trends, Pidherny noted that median ratios for coverage of full obligations improved for both wholesale and retail systems, sustaining an upward trend. Wholesale and retail, as well as combined ratios for Fitch entire portfolio of public power utilities continued a gentle upward slope, converging around 1.4 times debt obligations in the 2021 peer review.
Cash on hand medians for retail and wholesale utilities improved again, rising to the highest levels observed in a decade, according to the report. Fitch analysts attributed the build-up of excess cash to modest levels of capital investment, stronger than anticipated demand through the coronavirus pandemic, and disciplined rate setting initiatives.
The median capital expenditure-to-depreciation ratio for wholesale power systems continued a downward trend, falling to 71 percent. The median ratio has been below at or below 100 percent for five of the last seven years, according to the report. The median capex-to-depreciation ratio for retail power systems “improved” to 149 percent, a level last observed in 2010, Fitch said.
Leverage metrics for both wholesale and retail systems were largely unchanged, the report found, with a modest increase in leverage among retail power systems offset by a modest decline in metrics for wholesale systems. Overall, the metric reflects the continuation of a deleveraging trend that began over a decade ago, Fitch said.
Fitch calculated the ratios for each issuer using audited information. More than half the audits used in the report are dated Dec. 31, 2020, but different audit dates were also used and could skew the ratio distribution, Fitch noted. The rating agency also noted that the ratios and metrics in the report may occasionally differ from those reported in new issue and rating reports because of adjustments made during the rating process to reflect additional information received from the issuer.