Partly influenced by coronavirus-related concerns, S&P Global Ratings lowered its outlook for the North American regulated utility sector to negative from stable.
Before the coronavirus became a serious concern, about 25% of North American utilities either already held a negative outlook or had ratings that were on CreditWatch with negative implications, the rating agency said in an April 2 note. "The North America regulated utility industry's credit quality was already weakening prior to COVID-19," S&P Global Ratings analysts wrote.
S&P Global Ratings acknowledged a "high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak," and used in its assessment of economic and credit implications the assumption, shared by some government authorities, that the pandemic will peak at midyear. S&P Global Ratings also reiterated the belief that measures adopted to contain COVID-19 have pushed the economy into a recession.
S&P Global Ratings expects North American regulated utilities to remain a high-credit-quality investment-grade industry, but projects "a modest weakening of credit quality," and warned that its median rating of A- could move to BBB+.
"We view COVID-19 as a source of incremental pressure and expect that the recession will lead to an increasing number of downgrades and negative outlooks," S&P Global Ratings said.
Many major utilities have seen their financial cushions reduced in prior years for various reasons, from wildfires in California to large capital projects or utility acquisitions, as well as pressure from an increasing focus on environmental, social and governance factors. S&P Global Ratings noted that even many utilities with stable outlooks have "minimal" financial cushion at their current ratings levels, including as examples Exelon Corp., Edison International, Avangrid Inc. and Centerpoint Energy.
"As the financial effects of COVID-19 continue to take hold, we expect that even companies with stable outlooks may experience ratings downward pressure," S&P Global Ratings said. "This is another reason that underscores our assessment that the industry outlook has turned negative."
S&P Global Ratings is forecasting a more than 12% contraction in GDP during the second quarter of 2020, reducing commercial and industrial usage of electric power and increasing the possibility of increased "bad debt expense" as it becomes more difficult for consumers to pay their bills.
The industry does, however, "exhibit adequate liquidity and access to the debt markets" and is "benefiting from proactive risk management of establishing large credit facilities, having good access to additional liquidity through new term loans from banks, and public issuance of utility debt," S&P Global Ratings said in the report, though it noted that "availability to the equity markets remains extraordinarily challenging."
Utilities have levers it can use to mitigate some of the risks caused by the coronavirus, including cutting capital spending and dividends, according to S&P Global Ratings. But how much capital expenditures can be reduced varies by utility, with some able to slash as much as 60%, or others by as little as 15%, while maintaining safe and reliable operations.
"Should the recession prolong, we would expect that the industry would generally first reduce capital spending and only afterward cut dividends," the analysts wrote.
This S&P Global Market Intelligence news article contains information about credit ratings issued by S&P Global Ratings.