Bonds and Financing

Rating agency sees public power financial metrics remaining stable

Key financial performance metrics for U.S. public power electric utilities that own generation remained stable in fiscal 2017 and Moody’s Investors Service expects little change in these metrics over the next 12 to 18 months, given the sector's model of self-regulated rate setting and a business environment that includes low natural gas prices, more competitive renewable energy contracts, flat customer demand and limited new debt issuance.

In its Sept. 13 report, “Public Power Medians: Stability continues amid low energy prices, clean energy shift,” the rating agency outlined the factors incorporated into its analysis of the business environment for public power and why it believes the outlook for the sector's financial metrics will remain stable.

Moody’s said that the public power sector's fundamental business model strengths, which include local governance, unregulated retail rates and timely cost recovery, will not change. “Also, most public power electric utilities have automatic fuel and purchase power cost adjustment mechanisms, providing flexibility to recover higher-than-budget fuel costs,” it said.

Moody’s also said that public power electric utilities will continue to adequately adapt to restructured regional energy markets. “We expect competitive energy markets to be favorable for public power electric utilities' procurement strategies particularly if energy prices remain low, which will exert continuing pressure on owned generation to remain cost competitive.”

The rating agency said that its Macroeconomic Board expects that the Federal Reserve will gradually tighten its monetary policy, projecting three to four federal funds rate increases for 2018, followed by three more in 2019. Almost all public power utilities have fixed-rate debt, and debt-service schedules are typically level, Moody’s pointed out. “We believe this dynamic will result in a muted negative impact on the sector's financial standing.”

Meanwhile, Moody’s said that low-priced renewable energy contracts and low natural gas prices has limited the impact of the continued transition to clean energy on the sector's financial metrics. Electrification of transportation and buildings, development in storage technology and pressures on fixed cost recovery could present challenges in the future, it said.

“The threat of distributed generation will not have a financial impact, but utilities will focus more attention on protecting fixed cost recovery and capturing a larger percentage of customer costs under a fixed rate-making framework,” the rating agency added.

Fixed obligation charge coverage, liquidity

Moody’s said that the willingness and ability of public power utilities to increase rates drives stable debt service coverage.

For public power electric utilities that own generation, the median fixed obligation charge coverage (FOCC) ratio increased to 1.86x in fiscal 2017, the fourth consecutive year of improving FOCC levels. “The sector's sound rate-setting record and small operating cost increases were the main drivers of the stable coverage metrics,” the report noted. The median FOCC for all-requirement joint action agencies was unchanged.

Moody’s said that ample financial liquidity continues to demonstrate the sector’s sound financial position. “Median adjusted days liquidity on hand was 229 days in fiscal 2017 for public power electric utilities that own generation, down slightly from 242 days in fiscal 2016.”

Liquidity for the largest 50 public power electric utilities that own generation and all requirement JAAs remained level, as both unrestricted liquidity and operating expense levels changed only slightly, the report said.

Meanwhile, Moody’s reported that the median debt ratio fell to 51.0% for utilities that own generation nationwide, down from 54.6% the prior fiscal year. “This was driven by low demand growth, which limited new capital needs, outstanding debt amortization, and utilities utilizing renewable energy power purchase contracts rather than building owned generation units.”