DALLAS - Lower demand for electricity will reduce the need for public power utilities to borrow for new capacity in 2015, according to Moody's Investors Service.
"Environmental compliance and system reliability projects will remain a major focus of new capital improvement programs," analysts wrote in a public power sector outlook Dec. 16.
Moody's maintains a stable outlook for the industry, citing strong rate-setting ability, median debt service coverage of 1.6 times, and a recovering economy.
"Slow growth in demand for electricity will put pressure on utilities to raise electric rates because their fixed costs will have to be spread out over the same or a lower volume of electricity," they said. "Still, the improving U.S. economy and another year of low natural-gas prices will help keep electric rate increases moderate."
Moody's expects the economy to expand about 3% next year, up from about 2% in 2014.
Debt ratios for 18 of the largest 20 U.S. public power electric utilities with generation ownership fell between 2010 and 2013, according to the latest data available.
New York State Power Authority's debt ratio fell to 48% in 2013 from 51% in 2011, Moody's said. Seattle Light's ratio dropped to 62% from 67%. Jacksonville, Fla.'s JEA saw its ratio drop to 76% from 84%.
In a Nov. 19 news release, JEA noted declining sales for both electric and water, and a positive impact on its credit ratings from its commitment to pay down debt. The statement was in response to the mayor's request for $40 million over 10 years to close a contribution gap in police and firefighters pensions.
The phase-in of capital costs for several large, recently completed generation projects, including the troubled Prairie State coal-fired power plant in southern Illinois, weakened the metrics of several utilities, Moody's noted.
Paducah, Ky., saw its debt-service coverage ratio fall to 1.1-times in 2013 from 2.3-times in 2010 due to its involvement in the Prairie State Project.
"We expect that Paducah's financial metrics will improve in 2015, however, as the costs of the project have now been more absorbed into financial results and the utility has developed financial improvement plans," analysts said.
Slower growth in electricity demand adds risks for new projects such as South Carolina Public Service Authority's Summer nuclear project, analysts said. The utility also known as Santee Cooper holds a 45% stake in the project, which was designed to meet projected growth. However, lower demand has reduced the utility's need for its total share of the new nuclear capacity, according to Moody's.
"Causes of lower demand include the impact of the national recession on South Carolina and an agreement with a co-operative to allow it?to transition a portion of its power supply needs to another supplier over a six-year period," analysts said. "Santee Cooper is implementing strategies to mitigate the significant excess capacity when the units begin their commercial operation."
California's municipal electric utilities are on track to supply 33% of retail power with renewable energy sources by 2020, thereby reducing the utilities' carbon exposure, Moody's said.
"Questions remain about whether the transmission grid can manage the intermittent energy supply of solar and wind power and whether costs are affordable," they said. "The Los Angeles Department of Water and Power, for example, expects that retail rates will rise considerably. Consumer pushback on these rate increases could pressure the utility's credit metrics."
