Dive Brief:
- Moody's Investors Service predicts a stable environment in 2016 for regulated utilities, driven by what it believes will be a continued supportive regulatory environment, SNL reports.
- However, unregulated utilities with coal and nuclear plants are under stress, Moody's said, as falling power and gas prices will impact their operating cash flows.
- In PJM Interconnection's market, Moody's believes baseload coal and nuclear generators will benefit from higher capacity prices next year, but said the gains will be insufficient to offset the larger drop in wholesale power prices.
Dive Insight:
Looking ahead to next year, Moody's believes a supportive regulatory environment should keep regulated utilities on stable footing; however, despite some supportive market changes, unregulated utilities will struggle.
For regulated utilities, the stable outlook affirms Moody's expectation that regulators will continue enabling utilities to recover costs and maintain steady cash flows. Next year, the firm expects the cash flow-to-debt ratio to be roughly 21% for the industry.
Moody's pointed out one negative spot for regulated utilities. "While not a primary driver," the firm was critical of utilities increasingly using holding company leverage to drive returns. An increase in parent company leverage could have negative implications.
"We are finding that utility holding companies are increasingly using parent debt to finance M&A deals. Several recent acquisitions include the use of significant leverage at the parent as part of the acquisition financing," said Moody's Vice President-Senior Analyst Jeffrey Cassella. "As a result, we have taken negative rating actions on the parent's rating or outlook."
