Spotlight On Utilities

COVID-19 is creating logistical challenges for utilities along the Eastern seaboard and Gulf Coast for the 2020 Atlantic hurricane season.

As many sectors face unprecedented disruption related to demand contraction and turbulent credit markets, our utility analysts are actively engaging with the companies we rate to discuss potential challenges utility management teams face.

With pure-play renewable utilities outperforming their more diversified peers on stock markets in Europe amid a coronavirus-induced sell-off, fossil fuel generators hit by lower power prices and retail suppliers coping with a demand crunch could be set for a rebound.

The COVID-19 pandemic has created an unprecedented level of uncertainty and regulatory action in North America. Throughout the United States and Canada, many state and provincial governments have instituted mandatory moratoriums on utilities shutting off customers, or they have worked together to institute voluntary moratoriums during the COVID-19 pandemic.

These moratoriums, along with any lost revenues due to the economic impact of COVID-19 pandemic and the potential incurrence of higher operating expenses, may weaken financial measures of utilities. S&P Global Ratings has been monitoring these actions and their impact on credit quality of U.S. and Canadian regulated utilities.

The 2020 unemployment data for each of the 50 states and the District of Columbia is summarized in the below map.

S&P Global economists forecast U.S. GDP will contract 5.2% in 2020 and headline unemployment could reach 19% in May, even with an economic recovery beginning in the third quarter of 2020 (An Already Historic U.S. Downturn Now Looks Even Worse, April 16, 2020).

A recession caused by restrictions to control the coronavirus is likely to put pressure on U.S. public power utilities as cities grapple with budget shortfalls and struggling customers foreclose options such as rate increases or service disconnections.

Government-affiliated utilities have historically been "very stable and largely immune to pronounced effects from changing economic conditions" due to their consistent financial performance and typically autonomous rate-setting authority, S&P Global Ratings credit analyst David Bodek said.

Small and midsize natural gas utilities issued revenue, profit and capital spending warnings linked to the coronavirus outbreak, while their bigger peers largely shrugged off the pandemic's potential impacts on their gas business.

U.S. electric, gas and water utilities raised a total of $20.30 billion in March, with roughly $19.87 billion coming from senior debt offerings, according to S&P Global Market Intelligence data. The accumulated year-to-date capital raised by the sector, as of March 31, was $33.74 billion.

Berkshire Hathaway Energy issued $3.25 billion, including $1.1 billion of its 3.700% senior notes, $900 million of 4.250% senior notes and $1.25 billion in 4.05% senior notes. The company planned to use the proceeds to refinance short-term debt.

The impact of COVID-19 is expected to be felt on the utility sector for quite some time. The uncertainty associated with the pandemic has roiled the financial markets in recent weeks and has altered the focus of many utilities.

The likelihood of new large electric and natural gas utility mergers and acquisitions being announced in the near future has diminished significantly.

The coronavirus pandemic has presented utility regulators with a set of obstacles they have never before confronted, challenging them to adapt regulatory tools to balance the interests of ratepayers struggling through unemployment and gas distributors juggling unanticipated costs and lost revenues.