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North American Regulated Utilities’ Negative Outlook Could See Modest Improvement

Fixed Income in 15 – Episode 16


COVID-19 Impact: Key Takeaways From Our Articles


Vaccines Won't Be A Cure-All For Australia And New Zealand Corporates And Infrastructure


How Did Our Ratings Perform During 2020

North American Regulated Utilities’ Negative Outlook Could See Modest Improvement

Credit Quality Weakened In 2020

We revised the industry's outlook to negative in the first quarter (COVID-19: The Outlook For North American Regulated Utilities Turns Negative, April 2, 2020), citing the already high percentage of companies with a negative outlook or ratings on CreditWatch with negative implications (18%) and the additional potential credit risks from COVID-19. During the year, the utility industry performed poorly from a credit quality perspective. The negative outlooks or CreditWatch negative listings doubled and downgrades outpaced upgrades for the first time in a decade by about 7 to 1. As a result, while the median rating for the industry remains at 'A-', it is slowly creeping closer to 'BBB+'.

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COVID-19 Was Not The Culprit For Weaker Credit Quality

In March 2020, we identified five COVID-19-related risks that could lead to a weakening of the industry's credit quality. We expected that these developments could bring about a deterioration in the industry's 2020 funds from operations (FFO) to debt of about 100 basis points. These risks included the following:

  • Lower deliveries to commercial and industrial (C&I) customers;
  • Higher bad debt expense;
  • Delayed rate case filings, delayed rate case orders, or lower-than-expected rate case outcomes;
  • Lack of consistent access to the capital markets; and
  • Weaker market returns that could increase postretirement benefit obligations.

Encouragingly, the industry has generally performed well throughout the pandemic. Lower electric and gas deliveries to C&I customers were mostly offset by higher residential deliveries, the industry generally worked well with regulators to defer COVID-19-related costs for future recovery, market returns improved, and the industry generally had consistent access to the capital markets. The one area that we saw some weakness was with regard to rate cases. Many rate case filings were delayed, rate case orders often took longer than expected, and many of the orders were below expectations. This trend generally reflected the weak economy caused by COVID-19 and the difficulties of passing on higher costs to customers during the pandemic. We expect that as vaccines take hold and the pandemic dissipates, the economy will gradually recover, as will the industry's rate case performance.

As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Here's What Happened

The stark weakening of credit quality in 2020 primarily reflected environmental, social, and governance (ESG) factors, regulatory issues, and the industry's practice of continuing to manage its financial measures with little or no financial cushion from the downgrade threshold.

During 2020, we saw a number of ESG-related events that included:

Regulatory issues also contributed to a weakening of credit quality and included the following 2020 actions:

During 2020, we revised the outlook on a number of companies to negative and downgraded other companies, reflecting weak financial measures.

The industry's credit quality continues to be squeezed by the industry's tendency to strategically manage financial measures with only minimal financial cushion.

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What will occur in 2021?

We expect a marginal improvement in credit quality in 2021. We think it's likely that Congress will enact a higher corporate tax rate. This will help strengthen the industry's financial measures, partially offset by continued focus on ESG related risks.

Because President-elect Biden won the U.S. presidency and the democrats have control of the U.S House of Representatives and Senate, we expect Congress will more likely implement a higher corporate tax rate. While details of such a plan are limited, a key element of the proposal would likely call for an increase in the corporate tax rate to 28% from 21%. We estimate that this higher tax rate would improve the industry's funds from operations to debt by about 100 basis points (U.S. Regulated Utilities' Credit Metrics Could Strengthen Under Proposed Biden Tax Plan, Oct. 29, 2020). The improving financial measures would likely boost credit quality, enhancing utilities' financial cushions from their downgrade thresholds.

The industry's environmental risks including its exposure to greenhouse gas (GHG) emissions remain a key concern for investors. Despite the industry's enormous progress over the past decade, it has a way to go. Over the past decade, the industry significantly reduced its reliance on coal-fired generation and its associated level of carbon based emissions. The industry is no longer the number one North American emitter of carbon-based pollutants, reducing its carbon emissions by about 25% and has reduced its reliance on coal-fired generation by about 50%.

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Still, about 30% of the electric utility industry relies on coal-fired generation for at least 50% of its owned electricity production and about two-thirds of those utilities depend on coal-fired generation for more than 70% of their total generation. Investors are increasingly focused on environmental issues and given that the industry typically operates with negative discretionary cash flow, it relies on consistent access to reasonably priced capital markets. We expect that the continued focus on these ESG risks will weaken credit quality, offsetting much of the credit benefits from a potentially higher corporate tax rate.

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This report does not constitute a rating action.

Primary Credit Analyst:Gabe Grosberg, New York + 1 (212) 438 6043;
Secondary Contacts:Daria Babitsch, New York 917-574-4573;
Daniel Bairbekov, New York + 212-438-1903;
Minni Zhang, New York;

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