Bonds and Financing

S&P expects public power to maintain sound credit quality

S&P Global Ratings expects that public power and electric cooperative utilities will continue to face “significant uncertainties” in 2019, but S&P nevertheless believes that “these utilities will maintain sound credit quality, as they have in recent years.”

In its Jan. 22 report, “U.S. Public Power And Electric Cooperative Utilities 2019 Sector Outlook: Ratings Stability Persists In A Difficult Era,” S&P said that although it foresees technological, regulatory and economic risks, “we believe the utilities have a strong capacity for resilience because their revenues benefit from largely, if not fully, captive customers.”

Moreover, S&P views the autonomous ratemaking authority available to most of these utilities “as providing capacity to perpetuate a sound alignment among revenues, expenses and debt service as they respond to evolving exposures.”

S&P said that even electric cooperatives and public power utilities subject to regulatory oversight benefit from decisions that offer cost recovery and support sound ratings.

It noted that the ratings it assigns to public power and cooperative utilities are strong. The modal rating on the sectors is “A,” reflecting the attributes of strong customer bonds and financial flexibility through ratemaking “that contributes to secure and predictable revenues.” These factors provide the foundation for the generally stable ratings, S&P said.

Emissions regulations

The report noted that the Trump Administration has backed a number of regulatory reforms. “From the outset, the previous administration’s CPP [Clean Power Plan] has been in the crosshairs, which culminated in the EPA’s introduction of the Affordable Clean Energy rule in August,” S&P said, noting that the rule calls for the elimination of the CPP’s national carbon emissions reduction targets and provides states with significant flexibility in regulating power plant emissions.

“Although the Trump Administration’s actions slow utilities’ exposure to some emissions compliance costs, we believe the initiatives and their effects might be fleeting,” S&P said.

“The federal legislative branch now includes more members who are prioritizing climate change issues and constraining power plant emissions,” the report pointed out. Also, states are “increasingly acting to fill the gaps they perceive in the federal regulatory framework for power plant emissions.”

S&P said it also believes that public sentiment “increasingly favors emissions reductions across the board and see these views as potentially triggering legislative and regulatory responses. Consequently, we believe utilities need to adopt a long-term view of the regulatory landscape to maintain sound credit quality and demonstrate a strategic commitment to evaluating a susceptibility to more stringent emissions regulations.”

Renewable energy

Meanwhile, S&P said it is keeping track of the emergence of renewable resources to assess their effects on utilities.

“As part of our assessment, we compared 10 years’ of Energy Information Administration data for relationships among retail electric rate increases and renewable generation output statistics,” S&P analysts wrote. “We found that although the argument that it is costly to integrate renewable resources into a conventional generation portfolio is intuitive, only some of the states reporting the greatest increases in non-hydroelectric-renewable energy are among the states where utilities reported the largest increases in costs and rates.”

S&P said that it would continue to monitor statistics such as these in order to determine the long-term effects on the financial performance of utilities as they increasingly incorporate renewable resources into their generation portfolios.

Emerging technologies

This year, S&P expects utilities will continue to “pursue the technologically and economically elusive goal of storing surplus solar and wind production created during off-peak hours for consumption during peak hours,” which would better align the output of renewable resources with utilities’ financial and operational requirements.

EVs, blockchain and cryptocurrency

As for electric vehicles, S&P said sales of EVs might “upset the cart” for utilities if consumers embrace of EVs and their recharging behaviors create the need for more power plants. The report noted that while there has been a spike in EV sales in recent years, sales of EVs “remain only about 1% of national vehicle sales due to many factors, including a dearth of charging stations and the related ‘range anxiety.’”

S&P sees the proliferation of EVs creating benefits and risks for electric utilities. On the positive side of the ledger, electric sales that utilities make to recharge EVs “can help spread fixed costs more efficiently across all customers, particularly if utilities can create rate structures that give electric vehicle owners incentive to charge their vehicles at times when utilities tend to have surplus energy.”

But in the risk category, EV owners could charge their vehicles during periods that are not consistent with optimal grid management “because of perceived range anxiety and the practicalities of travelling from point A to point B and back without fully depleting a car’s battery.” Such behaviors, S&P said in the report, could result in generation investment needs that add balance-sheet debt.

The report also addresses blockchain data mining by cryptocurrency companies. Several public utility districts in the Pacific Northwest and public power utilities in New York State have proactively moved to address ramped up power demand issues caused by cryptocurrency mining.

S&P noted that cryptocurrency mining companies “tend to gravitate to regions with low cost energy and, in particular, those providing access to hydroelectric energy.”