LOS ANGELES -- Despite challenges of a stagnant economy and regulatory uncertainty that have been bearing down on U.S. public utilities in recent years, Standard & Poor’s said it believes the sector’s credit quality will remain solid and ratings stable in 2013.
“This will be in large part due to the effects of continued low gas prices, which influence electricity costs, public power’s rate-setting autonomy, and a lack of competition for retail customers,” said credit analyst Jeffrey Panger in a recent report.
The low natural gas prices are beneficial not only to utilities that purchase power or own generation assets fueled by natural gas, but also for utilities that might be able to save by substituting market purchases for the dispatch of their own solid fuel resources.
Standard & Poor’s said the savings are allowing many utilities to absorb increased costs related to environmental regulation and offset margin decline from lower electric sales related to the economy with little impact to ratepayers.
“While we note a recent increase, we expect that over the near-to-medium term natural gas prices will remain low relative to historical standards, helping to stabilize electric rates, competitive positioning, and financial results,” the report said.
Natural gas prices have ticked upward in recent months, which could result in higher operating costs for many utilities. However, analysts said that the rate impact should prove manageable, “in part because gas prices are still low relative to historical standards, and because it is just one component of total operating costs.”
Although the sector’s outlook is stable, it still faces some risks. These include an uneven and fragile economic recovery, the potential for additional emissions regulations, margins on surplus sales that remain thin, and the diminishing fuel diversity, among others.
Standard & Poor’s has 287 ratings in the public power sector, including wholesale, retail, and combined systems. All but one of the ratings are investment-grade.
“Although there are no ‘AAA’ rated public power utilities, we believe the rating distribution demonstrates overall credit strength, with about 31% in the ‘AA’ category and 64% in the ‘A’ category,” the report said.
Last year, Standard & Poor’s raised the ratings of 14 public power utilities and lowered the ratings on three, while revising outlooks on seven to negative. Currently, more than 95% of the rated public power entities have stable outlooks.