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Exelon, Southern, CMS Among Utilities With Highest Working Capital Ratios

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Exelon, Southern, CMS Among Utilities With Highest Working Capital Ratios

There was a modest uptick among energy utilities in two liquidity measures during the first quarter of 2020, arguably in response to the COVID-19 pandemic and its economic repercussions. Specifically, both the average working capital and the average acid test ratios were modestly higher on March 31, 2020, compared to Dec. 31, 2019, having increased to 0.74x from 0.70x and to 0.46x from 0.42x, respectively. We expect a further increase in these two liquidity measures in 2020's second quarter.

Among the companies with the highest working capital ratios are the large cap Exelon Corp., PG&E Corp., CenterPoint Energy Inc., Southern Co. and CMS Energy Corp. We note that PG&E has been operating under Chapter 11 bankruptcy protection since Jan. 29, 2019, but is expected to emerge from bankruptcy by June 30, 2020. Of the utilities with the highest working capital ratios, the top four are relatively small: Idacorp Inc., MDU Resources Group Inc., MGE Energy Inc. and Otter Tail Corp.

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Among the large utilities with the lowest working capital ratios are American Electric Power Co. Inc., Sempra Energy and Pinnacle West Capital Corp. Smaller utilities in this group are PNM Resources Inc., Hawaiian Electric Industries Inc., ALLETE Inc., Avista Corp. and El Paso Electric Co. Also in the lowest group are two gas companies, Chesapeake Utilities Corp. and South Jersey Industries Inc. We note that no stand-alone gas companies were among the utilities with the highest working capital ratios.

For a discussion of water company liquidity ratios and other topics see here.

Since many utilities are likely facing at least a slight reduction in revenues and increased costs directly related to COVID-19, including higher uncollectible expenses, during the recession, increasing liquidity is a prudent course of action. Another course of action that shores up a company's short-term finances is to increase bank lines of credit and many utilities did so in the first half of 2020. While utilities, due to the economically regulated nature of their businesses and the comparatively essential nature of their products, will likely only see slight negative financial impacts from the recession, a solid liquidity position serves as a bulwark against any unforeseen events. In addition, certain utilities serve industries and customers that may be worse impacted by the recession than those of the typical utility.

For utilities with the highest working capital ratios, Southern Co. is engaged in a two-unit nuclear expansion at its Vogtle site in Georgia, and the project has experienced significant cost overruns and schedule delays. CenterPoint Energy cut its dividend by 48% and reduced its planned 2020 capital expenditures by $300 million on April 1, after Enable Midstream Partners, in which the company owns an interest, cut its own quarterly distribution and expansion capital expenditures. CenterPoint currently is undergoing a review of its business strategy and operations. CMS Energy serves electric and gas utility customers in Michigan, a state particularly hard hit by COVID-19 driven unemployment. Otter Tail Corp. has significant non-utility manufacturing businesses that will likely fare worse is the recession than its upper Midwest traditional electric utility operations. IDACORP, MDU Resources Group, MGE Energy and NorthWestern Corp. are relatively small utilities serving the upper Midwest and Rocky Mountain regions.

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Among those companies with the lowest working capital ratio, Hawaiian Electric Industries provides electric service to most of Hawaii but also is the parent company of one of the state's largest banks/financial institutions and its liquidity ratio may be impacted by the customary accounting utilized by banks and other financial services companies. South Jersey Industries in 2018 completed the acquisition of New Jersey-based Elizabethtown Gas Co. and the extremely small Maryland-based Elkton Gas Co. from a subsidiary of Southern Co., and this transaction may still be impacting its balance sheet. ALLETE has a high industrial load and serves taconite producers, with taconite being a low-grade iron ore used in the steel industry, a sector that is sensitive to fluctuations in economic activity. Sempra Energy is an electric and gas energy infrastructure company that completed the acquisition of a major Texas utility in 2018 and is a significant developer of capital-intensive natural gas liquefaction facilities.

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Subgroup comparisons

The March 31 average working capital ratios for the three energy utility subgroups, electric, gas and multi-utility, show some variation, with the multi-utility having the highest and the gas the lowest ratio. All three subgroups, except gas, showed an uptick in this measure in the first quarter of 2020. The average subgroup results for the acid test ratio were somewhat different, with the multi-utility again the highest but the electric the lowest. All three subgroups saw an improvement in this measure in the first quarter of 2020, and the gas subgroup posted the largest percentage increase at 17.8%.

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Ratio definitions

The working capital ratio is calculated by dividing total current assets by total current liabilities. For that reason, it can also be called the current ratio. It is a measure of liquidity, meaning a business's ability to meet its payment obligations as they fall due. The ratio indicates the extent to which the claims of short-term creditors are covered by assets expected to be converted to cash in the near future.

The acid-test ratio, also known as the quick ratio, measures the liquidity of a company by calculating how well current assets can cover current liabilities by utilizing only the most liquid current assets that can be converted to cash within 90 days or less. The acid test ratio was calculated by dividing the sum of cash and cash equivalents, accounts receivable, current investments and unbilled revenue by total current liabilities. Unlike the working capital ratio, the acid test ratio does not include inventories in the numerator, with inventories considered the most illiquid of current assets.

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

For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Global Market Intelligence Energy Research Library.

Charlotte Cox contributed to this article.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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