With increasing unit costs, the financial prospects and credit outlook for many utilities will depend on their success in passing along such costs to consumers.
Ellen Lapson, CFA, is a managing director in Fitch Ratings’ North American Global Power Group, rating the credit of U.S. and international electric utilities, energy marketers, project finance transactions, and structured finance. Lapson can be reached at ellen.lapson@fitchratings.com.
The utility sector still has excellent access to the capital and credit markets. Yet, it is never safe to assume utilities will continue to enjoy the same low costs of capital. This is particularly true for companies facing compressed margins, regulatory deferrals or disallowances, and rising debt leverage.
Unit costs of electricity and gas service are rising faster than the underlying inflation rate, and that trend will intensify with the higher market prices of natural gas and other energy commodities.
Commodity prices are not the sole factor raising the longer-term costs of electric and gas service. Capital expenditures are on the rise for network reliability, mandated environmental compliance, and resource adequacy. Utilities face rising non-fuel operating and maintenance expenses, particularly for pensions, employee medical expenses, and post-retirement benefits. A trend of declining interest expense that benefited the sector over the past four years is likely to reverse in the next several years. These factors all contribute to an outlook for rising unit costs of electric and gas service. In an environment of increasing unit costs, the financial prospects and credit outlook for many utilities will depend on whether they pass along such costs to consumers in the form of higher tariffs.