S&P reports that electric utilities in Florida, Texas, Virginia, and Washington should be closely watched for potential negative credit impacts of higher capital spending, particularly to address wildfire risks and resiliency.  This will be an issue in the upcoming rate cases.  

Electric utilities’ negative credit outlooks reflect higher costs

Tuesday, February 27, 2024 1:29 PM CT

By Tom Tiernan

The credit ratings of many utilities are being downgraded as they are forced to spend more to ensure grid reliability and find ways to protect themselves from liability in the face of more frequent extreme weather events, panelists said during a Feb. 26 breakfast meeting sponsored by the Edison Electric Institute.

Credit ratings agencies’ negative outlook for the electric utility sector reflect higher capital costs for utilities, speakers from Moody’s, Fitch Ratings and S&P Global Ratings explained during the event.

S&P Global Ratings recently revised its outlook for North American utilities to negative because “downgrades have consistently outpaced upgrades,” said Gabe Grosberg, managing director of North American regulated utilities at the rating agency.

The downgrades, which mark the fifth consecutive year that downgrades have outpaced upgrades, reflect wildfire risks and “record high capital spending that’s driving very high negative discretionary cash flows that are not necessarily funded in a credit-supported manner,” Grosberg said.

Capital spending across the utility industry reached $170 billion in 2023, with more than half of that spent to protect transmission and distribution infrastructure from extreme weather events, said Shalini Mahajan, managing director for Fitch.

A few states are “ahead of the curve” in ensuring that utility costs for long-term resilience can be recovered promptly and without putting too much upward pressure on utility customer bills, Mahajan said.

Mahajan cited Florida, Texas, Virginia and Washington as examples, with Virginia allowing targeted undergrounding of facilities in hurricane-prone areas and Texas legislation enabling three-year resilience plans to go to state regulators for review for expedited recovery of capital costs.

State level

At the state regulatory level, 17 states allow performance-based ratemaking to try and foster multiyear planning and spending to reduce operation and maintenance costs, Mahajan said on a panel moderated by Diane Burman, a member of the New York Public Service Commission.

Fitch and Moody’s have also issued negative credit outlooks for the utility industry as a whole. The moves reflect high inflation and interest rates, large increases in load growth after decades of stable demand, and pressure on utilities to keep customer bills affordable, said Mahajan and Natividad Martel, vice president and senior analyst at Moody’s.

Tax credits provided by the Inflation Reduction Act can help make the clean energy transition more affordable for utility customers, Mahajan and Martel agreed, also saying that regulators can allow utilities to spread the costs over a longer timeline.

Utility insurance companies are seeing more costly events, and their assessment of risks to utilities is evolving as the utility industry adjusts to more challenges, officials with Associated Electric & Gas Insurance Services Ltd., known as AEGIS, Marsh Specialty Energy & Power and Bank of America Corp. said during a separate panel discussion.

With the frequency and severity of wildfires increasing in California and elsewhere, more utilities are seeking insurance coverage for such events, and those costs have soared, said Nick McKee, head of US energy and power corporate banking at Bank of America, and Aegis President and CEO William Hillman.

Pipeline cyberattack

Hillman recalled seeing a similar dynamic in the immediate aftermath of the Colonial Pipeline cyberattack in May 2021 that resulted in the shutdown of the liquids pipeline system. Physical and cyber insurance costs for pipeline companies “went through the roof” in late 2021 but have begun to shift back to lower levels, Hillman said.

Wildfire insurance for utilities can cover utility assets and risks to non-utility assets that could be affected by a wildfire, said Michael Kolodner, practice leader, US power and renewables industry, at Marsh Specialty, an insurance subsidiary of Marsh & McLennan Cos. Inc.

Utilities’ steps to mitigate wildfire risk — such as placing assets underground, shutting off power when wildfire risk is high in a specific area, and vegetation management along utility power lines — can help but “take a very long time to implement,” Hillman said.

Many utilities are bumping up against what they want to have covered under insurance plans and what they can afford to have covered, the insurance industry panelists told the event audience.

This report may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this report were not prepared by S&P Global Ratings.

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.