- Negative short- and long-term outlook for U.S. electric utilities, parent holding companies and retail propane distributors.
- The short- and long-term outlook for the natural gas distribution utilities, natural gas and product pipeline products companies and natural gas gatherers is stable.
- The short-term outlook is negative for natural gas processors in 2009 and expected to be stable in the long term.
- The short- and long-term outlook for public power entities is stable.
The essential nature of the U.S. Utilities, Power and Gas industry's products and its relatively predictable, regulated cash flows has, and is expected to continue, to facilitate access to capital, albeit at significantly increased rates. Nonetheless, the 2009 fundamental outlook for the sector is expected to be challenged in the future by a significantly higher cost-of-capital compared to the levels experienced through mid-2008.
The change in capital markets coupled with large, mostly non-discretionary construction budgets, regulatory lag and the potential for mounting consumer resistance to rate hikes given the evolving consumer-led global recession is likely to result in erosion of existing credit metrics. Fitch believes utilities operating in regulatory jurisdictions with significant regulatory lag and/or a dearth of tariff mechanisms designed to facilitate timely recovery of costs in rates are particularly vulnerable and may be subject to negative credit rating actions in the future.
Utilities operating in jurisdictions with multi-year rate caps or freezes, such as Pennsylvania or Ohio, are particularly vulnerable in Fitch's opinion. Conversely, utilities operating in jurisdictions with forward test years, balancing accounts and procedures designed to facilitate timely recovery of prudently incurred costs outside of general rate case proceedings and pre-approval of planned construction costs are more likely to maintain, or perhaps improve, creditworthiness. The sector also benefits from its strategic focus on core utility operations and balance sheet strengthening in recent years and lower natural gas prices.
While some more highly rated utility parent companies such as Dominion Resources and Sempra Energy have been able to issue senior unsecured debt, the vast majority of financings have been executed by utility operating companies with mid-'BBB' credit ratings or higher and much of that on a secured basis and at a cost well-above year ago levels. Funding for low 'BBB-' issuers is very costly and even more so below investment grade.
The outlook for competitive generating companies is negative in 2009 but stable in the longer term. The negative outlook for the sector in 2009 is driven by capital market constraints and recessionary pressures, combined with declining power prices, potentially rising environmental costs and counterparty credit and liquidity concerns. Post-2009, Fitch expects a stable outlook more appropriately reflects the potential for improving spark and dark spreads as industry reserve margins continue to tighten over time. Fitch anticipates material capital expenditure reductions from the generators in 2009 and 2010.
Fitch continues to maintain its stable outlook for the municipal and cooperative sectors (public power) for 2009. Overall, the sector continues to maintain solid credit fundamentals, including: local control over rate-setting without state commission oversight, a cost advantage compared to neighboring investor-owned utilities and benefits associated with predominantly residential and commercial customer bases. However, in the event that current pressures such as limited capital market access, together with increasing economic stress persist long into 2009, a revision in the public power outlook to negative may be warranted.
The short- and long-term outlook is stable for the natural gas and products pipelines in 2009, although a continuation of unfavorable capital market conditions, aggressive capital investment and recession could result in a moderate weakening of credit metrics.
The short- and long-term outlook for the natural gas gatherers is stable as well, reflecting the group's relatively predictable, primarily fee-based revenue stream, strong underlying demand growth and discretionary capital expenditures.
Meanwhile, a weak economy and low energy commodity prices result in a negative short-term outlook for the natural gas processors; however, the stable long-term outlook is supported by manageable debt leverage, discretionary capital expenditures and expectations that NGL pricing will remain within historic norms experienced in 2005/2006.
The outlook for retail propane distributors remains negative as the result of declining volumes and the uncertain impact of consumer conservation in a lower natural gas price environment.
