Fitch: Stable Financials Support US UPG Credit Quality

NEW YORK & CHICAGO--(BUSINESS WIRE)-- Link to Fitch Ratings' Report: U.S. Utilities, Power & Gas Data Comparator (Sector Financials Remain Stable)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871284

U.S. utilities, power & gas (UPG) credit quality has benefited from stable financial metrics, according to Fitch Ratings.

The key trends that have influenced UPG issuers' financial profiles include generally supportive regulatory frameworks, fairly accommodative capital markets, low commodity prices that relieve pressure on retail customer bills and operational cost control that more than offsets an uneven recovery in electricity sales.

Second-quarter 2015 LTM leverage metrics remained relatively unchanged year over year (YOY), while interest coverage metrics modestly improved. Fitch Ratings expects this trend to broadly sustain for the remainder of the year. The extension of bonus depreciation at the end of 2014 provided an unexpected boost to utility cash flows, and the positive momentum has carried through 2015. Barring a renewal of bonus depreciation at the end of the year, we expect cash flow measures of UPG issuers to return to more normalized levels.

The credit profile of the capital-intensive utility industry closely mirrors the level and direction of interest rates. The sustained low interest rate environment has allowed issuers to refinance high-coupon legacy debt with lower coupon new debt. Fitch believes a rise in interest rates would largely be neutral to credit quality, as companies have generally built enough headroom in coverage metrics to withstand higher financing costs.

Fitch anticipates the wave of industry consolidation to persist in the forecast horizon, as utilities look to expand operating and geographic scale to combat the anemic sales growth that has plagued the sector in recent years. The accelerated pace of M&A and associated debt funding results in weaker pro-forma leverage metrics for acquirers and increased pressure on ratings. Fitch has placed numerous acquiring entities on Rating Watch Negative upon deal announcement, and in several instances, a one-notch rating downgrade occurred upon merger completion.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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