U.S. public power companies and electrical cooperatives should see significantly fewer credit ratings actions in 2022, Fitch Ratings said, as the sector benefits from a neutral, stable outlook following an Arctic freeze in February that caused widespread blackouts across the Southwest and pressured the balance sheets of many utilities.
The public power sector continues to enjoy strong fundamental characteristics, including reliable cash flow, rate-making authority, the critical importance of electric service and "mandates to serve well-defined areas with monopolistic characteristics," the credit rating agency told clients in a Dec. 7 report, making the difficulties experienced by the industry in 2021 largely an anomaly.
But credit profiles for 19 public power providers and electrical cooperatives operating in the Electric Reliability Council of Texas Inc. market may not improve significantly in 2022 absent adequate protection against future severe weather events, according to Fitch. Many are still trying to recoup costs from the $9,000/MWh market cap price ordered by the Public Utility Commission of Texas during the multiday storm.
"While Fitch resolved the [Ratings Watch Negative] on 18 of the 19 issuers — downgrading seven and affirming 11 — the outlook on all but one of these issuers remains negative," the report said. "Fitch expects no further resolution until measures and or risk-mitigation strategies are implemented that provide sufficient protection against recurrence of a financial event of this magnitude."
Rayburn Country Electric Cooperative Inc., for example, fully drew on its $250 million syndicated line of credit and also entered a one-year, $300 million bilateral line of credit with the National Rural Utilities Cooperative Finance Corp. as a result of the freeze, while City Public Service of San Antonio, or CPS Energy, is proposing a 10% rate increase due in part to storm costs. Pedernales Electric Cooperative Inc. and Brazos Electric Power Cooperative Inc. were also exposed to skyrocketing prices, with the latter filing for Chapter 11 bankruptcy protection in March.
High fuel and purchased power costs, particularly given growing natural gas generation, could also exacerbate public power firms and electrical cooperatives' balance sheets in 2022.
"Historically low interest rates and robust access to the capital markets should remain positive for the capital-intensive Public Power sector, as lower rates allow issuers to reduce interest expense and lower revenue requirements," Fitch noted. "However, upward pressure on interest rates could reduce the benefits of refunding. In 2021, less than half of the municipal power debt issued was earmarked for refunding for only the second time since 2010."
The credit rating agency also expects nominal electric prices in 2022 to increase by 3.6%, "marking the first time prices have risen by more than 3% two years in a row since 2005/2006."
The National Rural Electric Cooperative Association on Dec. 1 asked the Biden administration for relief as global supply chain disruptions during the coronavirus pandemic create substantial backlogs for key materials and equipment, warning of "higher electric bills amidst price increases economywide as we approach the winter season."
