Bonds and Financing

S&P, Fitch weigh in on impact of recession, pandemic on public power

S&P Global Ratings and Fitch Ratings have issued reports examining the impact of the COVID-19 pandemic and resulting economic downturn on the public power sector.

For its part, Fitch said that as of April 2020, the outlooks for the public power sector remain stable.

At the same time, the rating agency said that the electric utility operating environment is facing unprecedented near-term challenges, including:

  • Diminished affordability as a result of economic shocks and “shelter-in-place” restrictions;
  • Dramatic declines in energy demand;
  • Unsettled capital markets; and
  • Heightened liquidity requirements

Fitch said that outlooks for the public power sector will hinge on the ultimate severity of the economic contraction and the duration of government restrictions.

The operating environment will be dictated by trends and developments related to several factors, Fitch said, including recovery of employment and household income, recovery of electric demand and energy sales and fuel prices and interest rates.

The rating agency said that the outlook for public power issuers (utilities) remains overwhelmingly stable.

It broke out issuer outlooks as follows: Stable Outlook, 88%; Positive Outlook/Watch, 4% and Negative Outlook/Watch, 8%.

Fitch said the outlook for the sector and individual issuers will continue to depend on:

  • Expectations for the severity and length of the economic contraction and government restrictions;
  • The prospects for, and pace of, economic recovery on a national, regional and local basis;
  • The ability and willingness of issuers to exercise rate-setting authority to preserve financial performance; and
  • The extent of strains on issuer liquidity and leverage ratios

S&P Global Ratings

For its part, S&P Global Ratings noted in an April 29 report, “The Recession Could Erode U.S. Not-For-Profit Utilities’ Financial Flexibility,” that historically the rating agency has viewed these utilities as very stable and largely immune to pronounced effects from changing economic conditions. “We have typically reflected this view in the mid-investment grade ratings we have assigned to utility enterprises,” S&P noted.

It said that the investment-grade ratings are a function of utilities’ consistently sound financial performance, “coupled with the almost universal autonomous rate setting authority utilities possess.”

S&P said that under ordinary circumstances, this authority provides “financial nimbleness to respond to changing situations by adjusting rates to preserve a sound alignment among revenues, expenses and debt service. However, recent weeks have been anything but ordinary, calling into question the degree of credit support that the legal right to establish rates autonomously provides.”

S&P noted that it believes there is a meaningful distinction between the legal right to adjust rates and the practicalities of adjusting rates.

As the COVID-19 pandemic accelerates “and economic activity contracts due to illness and social distancing directives, S&P Global Ratings views these utilities as increasingly vulnerable to the potential economic effects of the pandemic.”

At the same time, the rating agency noted that its revised view of the capacity for financial and operational resilience among utilities does not mean that it foresees a wholesale negative revision of individual utilities’ outlooks, as S&P did with other public finance sectors that it considers more vulnerable to the financial fallout from the pandemic and recession.

S&P’s revised view for water, sewer, electric and gas utilities “means that we believe ratings on certain utilities are increasingly susceptible to the negative effects of the recession. In addition, it’s unlikely during the near term that ratings on utilities will exhibit upside potential in the face of strong recessionary obstacles,” especially given the unknown length and depth of the recession and pandemic.

S&P believes the “prevailing and extreme recessionary pressure impair utilities’ ability to exercise their raise rates in response to revenue stream erosion.”

For individual utilities, the rating agency expects the effects of the recession and the pandemic will vary depending on service area characteristics such as customer class distribution, customers’ income levels and other economic factors.

 Moody’s stable outlook for public power reflects expectation for resilience during pandemic

Moody’s Investors Service on April 22 said that its outlook for the U.S. public power sector remains stable because it expects the sector to be relatively resilient through the coronavirus outbreak and the resulting downturn.

“Public power utilities provide essential services in a nonprofit manner, have strong liquidity, continue to deleverage and benefit from cost recovery through self-regulated rate-setting,” Moody’s said in the report.