Exposure to rising interest expense is expected to be an easier issue to manage for North American utilities in 2023, compared to soaring commodity prices that are pressuring customer bills and heightening overall credit risk for the sector.
At least 13 holding companies have hundreds of millions in debt maturing during the first half of 2023, according to S&P Global Market Intelligence data. Bond analysts at CreditSights do not expect problems for utility debt refinancing, even for companies with significant maturities on the horizon.
"We do not see any significant or even slightly concerning refinancing risk for utility [holding companies] over the next two years into the higher interest rate environment," CreditSights analysts wrote in an October report.
NextEra Energy Inc.'s funding arm has more than $4 billion coming due through June 2023, the most of any sector company, followed by Atmos Energy Corp., which has $2.2 billion. OGE Energy Corp. and Dominion Energy Inc. each have $1 billion of debt maturing during the first six months of next year.
Interest rates skyrocketed in 2022, spurring concerns that utilities might have to cut operations and management budgets, or take other measures, to counterbalance that expense. And some utility holding companies have trimmed near-term earnings guidance and initiated lower-than-expected growth rate estimates due to higher short-term and floating-rate debt costs. But most utilities, particularly larger names in the sector, have hedges in place to avoid that exposure.
NextEra, Southern Co. and WEC Energy Group Inc. have the highest exposure to increased interest rate expense over the next year or two, according to CreditSights, but any rise in dollar amounts is "overall insignificant." Still, in the view of CreditSights, bondholders would benefit if NextEra pays down a portion of its debt maturing over the next year, given that it has a higher ratio than its peers of holding company debt to overall debt.
Commodity price pressure
Fewer options exist for utilities looking to mitigate hefty customer bills exacerbated by the industry's already weakened credit profile, as indicated by Fitch Ratings' "deteriorating" outlook for 2023 after years of a stable view.
"The biggest pressure on these guys ... is bill pressure from commodity prices," CreditSights senior analyst Andrew DeVries said in an interview.
Fitch's base case calls for a 15.8% increase in retail rates from 2022 to 2023, building on a "sharp escalation" during 2022. That leaves utility holding company management teams with few options for maintaining affordability.
"The logical thing to do is cut the [return on equity], but [regulators] can't cut the ROE when interest rates are going up," DeVries said. "You can tweak the capital structure but everyone's generally around [50% equity and 50% debt], so that leaves cutting capex ... but what do you cut? Most of the spending utilities are doing is wildfire or hurricane mitigation or decarbonization."
Utilities serving New England and New York are most at risk due to the region's lack of natural gas pipeline capacity to offset expected winter shortages, DeVries noted. Gas buyers can turn to three active liquefied natural gas import facilities with a combined capacity of about 2.2 Bcf/d, but U.S. senators representing six New England states have flagged added winter reliability concerns because of high global LNG prices.
"Eversource Energy is sitting on $450 million of bad debt expense and they have to ask the regulators to cover it," DeVries said, referring to debt expenses that cannot be collected due to financial issues, including state-imposed moratoriums on service cutoffs.
Stake sales
One remaining viable path for paying down debt is asset and minority stake sales. Contracted renewables portfolios like Consolidated Edison Inc.'s Con Edison Clean Energy Businesses Inc. are selling at attractive multiples, thanks in part to the tax incentives provided in the Inflation Reduction Act. That portends a substantial windfall for Eversource once it finds a buyer for a 50% equity stake in 1,760 MW of East Coast offshore wind projects under development.
"Those are red hot," DeVries said about contracted assets. "Everyone wants to be in that business, and those sales create equity for the sellers."
Offloading regulated assets through minority stake deals, DeVries added, is "not as good as a nonregulated asset sale, it's not as good as issuing equity, but it certainly plugs the gap from a credit ratings point of view."
Duke Energy Corp., NiSource Inc. and American Electric Power Co. Inc. have already announced such transactions, while Dominion may consider a similar strategy. But interest rates will determine whether the robust market for regulated assets continues, according to DeVries.
"FirstEnergy Corp. sold 20% of [its transmission business] when long bonds were 150 basis points lower than where they are now, so you have to imagine a buyer's going to take that into account and pay a lower multiple on the same earnings stream," DeVries noted.
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