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COVID-19 Related Obstacles Could Give Pause To Utility Capital Expenditure Plans

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COVID-19 Related Obstacles Could Give Pause To Utility Capital Expenditure Plans

While expectations remain high that considerable levels of capital expenditures will continue to support utility profit expansion in coming years, the ongoing COVID-19 pandemic will likely give management teams pause regarding the timing and scale of capital expenditure programs given ongoing economic uncertainty and an anticipated recession. Also, supply chain manufacturing problems worldwide in the booming renewables sector will likely delay some wind and solar projects for the utility sector.

During the December 2007-June 2009 recession, numerous utilities made downward revisions to capital spending budgets, with credit market and economic uncertainty as well as slower demand forecasts tied to the weakened economy factoring heavily in utility infrastructure and spending outlooks. We note that capex continues to be a moving target that could change as the financial and economic landscape evolves and companies evaluate both short- and long-term forecasts in coming weeks and months.

As illustrated below, U.S. utility capex declined by approximately 4% in 2009 to roughly $71.10 billion as the shake-up in capital markets and recessionary pressures took a toll on spending plans. Capex remained relatively flat in 2010 before increasing nearly 7% to $75.51 billion in 2011 as utilities returned to a more aggressive spending posture with economic conditions stabilized.

Since 2011, U.S. energy utility capital expenditures have steadily increased, reaching $121.78 billion in 2019, a 3.8% increase over 2018's total of approximately $117.27 billion as electric, gas and multi-utilities continued to invest in infrastructure to upgrade aging transmission and distribution systems, build new generating facilities, and implement new technologies, including smart metes and smart grid systems, cybersecurity measures and battery storage. We expect electric transmission and distribution to remain a major component of utility capex programs given the sheer scale of U.S. electric networks and the ongoing need for investments to replace and modernize aging infrastructure, connect new generating sources and to service new demand.

From a liquidity perspective, capital markets access is not an issue, with multiple utilities, including large caps NextEra Energy Inc., Exelon Corp., Dominion Energy Inc. and Southern Co. moving aggressively in the first quarter to shore up balance sheets ahead of what could be an extended economic downturn, particularly if the coronavirus outbreak persists and state- and locally imposed restrictions are extended. NextEra management on April 22 indicated its liquidity position is sufficient to weather the COVID-19 pandemic while supporting its multibillion capex program centered around its principal utility Florida Power & Light Co. its competitive energy arm NextEra Energy Resources LLC.

Ahead of first-quarter earnings season, FirstEnergy Corp., which in recent years has transitioned to primarily electric T&D operations, affirmed its 2020 EPS outlook and growth targets, as well as plans to issue up to $600 million of annual equity in 2022 and 2023 to fund the company's growth plans. Financial Focus estimates FirstEnergy's capex between 2020 and 2023 at approximately $12.4 billion. Note that utility capex is funded through a combination of internal cash flows and debt and equity issuances.

For those companies that experience near-term cash flow pressure due to the COVID-19 outbreak, a deferral, rather than outright cancellation, of planned capex to later years is likely a more palatable option as companies strive to meet EPS and dividend growth targets. In early April, CenterPoint Energy Inc. deferred $300 million of its planned 2020 capital expenditures and announced new O&M reduction targets after Enable Midstream Partners, of which CenterPoint owns a 53.7% interest, announced a reduction to its quarterly distribution.

Regulatory Research Associates is a group within S&P Global Market Intelligence.

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