US utilities to issue less debt in 2022, overall sector capex to drop slightly

U.S. investor-owned utilities are expected to rely less on debt in 2022 for capital needs, as the sector manages energy transition costs and a potential influx of federal funds from U.S. President Joe Biden.

Bond analysts at CreditSights forecast utilities to issue approximately $81 billion of debt in 2022, down from roughly $95 billion issued so far in 2021, according to a Nov. 18 report. Out of that $81 billion, roughly $31 billion will be the refinancing of maturities to take advantage of significant interest cost savings available at both the holding company and operating company level.

Holding companies, including NextEra Energy Inc., Exelon Corp. and DTE Energy Co., and operating companies, including Pacific Gas and Electric Co. and Duke Energy Progress LLC, have some of the largest amounts of debt maturities occurring in 2022, according to the credit research firm.

Any savings generated by operating companies refinancing debt will flow to ratepayers, not shareholders, but that still creates incentives for utilities to do so. "[W]ith natural gas prices surging, utility management teams will take every bit of 'headroom' they can get to raise rates on the [transmission and distribution] portion of the bill without a big increase on overall bills," wrote Andrew DeVries, CreditSights senior analyst and co-head of U.S. investment-grade credit.

CreditSights expects roughly $35 billion in debt issued by utilities in 2022 will be allocated for growth capital expenditure that is not funded internally or through equity, $10 billion will be securitization debt and $5 billion will be for potential M&A or issuances by foreign companies or smaller utilities outside of the analysts' coverage. The $35 billion in new debt represents a 6% increase for utilities, which is in line with earnings per share growth forecasts of 5% to 7% by most major U.S. utilities "and should, therefore, lead to stable credit metrics," DeVries wrote.

The Edison Electric Institute, the trade group for investor-owned utilities, forecasts overall 2022 capex by its members at $139.3 billion, according to an October investor briefing. That is down slightly from $143.3 billion in 2021 but up significantly from $113.1 billion in 2017 and $90.3 billion in 2012, according to EEI. CreditSights forecasts that out of the approximately $140 billion in planned capital investment by utilities in 2022, 60% will be funded internally, 25% with new debt and the rest with equity.

Although the ratio of funds from operations to debt has been falling at utilities, CreditSights noted that this is occurring as many major companies in the sector have been transitioning to fully regulated businesses. DTE, CenterPoint Energy Inc., Consolidated Edison Inc. and Dominion Energy Inc. have all pursued strategies to unload natural gas transportation and storage assets. Although antitrust concerns scuttled Dominion's planned sale of its Questar Pipeline Co. to Berkshire Hathaway Energy, a deal is now pending with Southwest Gas Holdings Inc., which is opposed by activist investor Carl Icahn.

Public Service Enterprise Group Inc. is pursuing a similarly streamlined approach after agreeing to divest its fossil fuel generation portfolio for $1.92 billion, while Sempra sold a 20% stake in its North American non-utility infrastructure arm to make that subsidiary entirely self-funding. FirstEnergy Corp. is also eyeing an improved balance sheet after issuing $1 billion of common stock to Blackstone Infrastructure Partners LP that could be used to pay down debt.

Another potentially significant factor for utilities' 2022 capital spending plans is the trillion-dollar bipartisan infrastructure bill that Biden signed into law Nov. 15. In a report ahead of the bill's passage, S&P Global Ratings said Nov. 9 that the bill could "offer temporary relief" for some investor-owned regulated electric utilities by "modestly offsetting the funding needs for affected utilities who already face elevated capital spending."

At the same time, however, the Biden administration's push to decarbonize the power grid by 2035 may force some of the same utilities to spend more.

"The longer-range implication for credit quality, in our view, rests on how well affected utilities manage the pace of transition to a net-zero carbon future while effectively managing regulatory risk and ensuring that financial policy decisions remain commensurate with maintaining credit quality," Ratings said.