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). In a six-week period, S&P Global Ratings took over 680 rating actions, in addition to almost 730 outlook revisions or CreditWatch placements, globally, citing COVID-19 coronavirus, oil prices, or both as a factor (as of April 23). Within the broader corporate ratings environment, the energy sector had the greatest number of issuers affected at 138 (chart 1). (COVID-19: Coronavirus- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date, April 29, 2020.) Despite the pronounced effect of COVID-19 on industries worldwide, the North American regulated utility industry remains open for business and continues to provide essential services.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Chart 1

North American Regulated Utilities Remain Open For Business

The regulated utilities industry has taken proactive steps to ensure continued access to safe and reliable services over the past several weeks in spite of the pandemic-related operational challenges. Such efforts include requiring personal protective equipment and social distancing for necessary face-to-face interactions, enabling remote working conditions for employees, and modifying critical facilities such as power plants and operation centers to enable staff to remain onsite throughout the pandemic. The combined efforts have allowed utilities to continue to provide the essential services necessary to maintain our day-to-day lives. Additionally, because of social distancing, the industry's implementation of advanced metering infrastructure (AMI) is reducing the risk of more frequent customer interactions, as AMI allows for two-way remote communication between customers and service providers.

The Industry Continues To Maintain Adequate Liquidity

Despite the challenges associated with the economic downturn, the utility industry has preserved its investment grade profile and maintained adequate liquidity in part by securing multiyear revolving credit facilities that are sized to sufficiently cover cash needs over a 12-month period. This has supported our view of the industry maintaining adequate liquidity as it pertains to S&P Global Ratings methodology. (Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014). During the first quarter of 2020, this trend continued, as utilities renewed or expanded the capacity of their revolving credit facility agreements (table 1).

Table 1

In reality, however, credit facilities are not often the most economical source of liquidity for a company; instead, the industry frequently utilizes its variable rate commercial paper programs to fund daily working capital needs. Credit facilities often act as a backup source of liquidity should volatility arise in the commercial paper markets. This was evident during this previous quarter when COVID-19-related uncertainties led nonfinancial commercial paper rates to spike to levels unseen since the financial crisis of 2008.

Chart 2

During the first quarter of 2020, we saw many utilities enter into 364-day term loans to lock-in liquidity at reasonable rates. We view this positively as it allowed the industry to circumvent the volatile commercial paper markets, strengthening the industry's near-term liquidity position.

Table 2

During the financial crisis of 2008, many companies significantly drew down on their credit facilities which weakened their liquidity position. However, because of alternative liquidity means, such as 364-day term loans and sufficiently sized credit facilities, the industry has more effectively managed liquidity during the current pandemic. Another factor differentiating the current period from 2008 deals with the issuance of long-term debt: During the financial crisis, direct long-term borrowing, from either banks or through the issuance of public debt, was for some time mostly inaccessible for some issuers. In contrast, during the first quarter of this year, the industry issued a record level of long-term debt (chart 3), demonstrating consistent access to the public debt markets. At the same time, while credit spreads generally widened, pricing remained at or below historical years. Notably, holding companies, in addition to their utilities, were able to access the capital markets--another key difference compared to 2008 (chart 4; table 3).

Chart 3

Chart 4

Table 3

Capital Spending Plans Remain Strong

The industry's consistent access to the capital markets is critical for credit quality as utilities typically operate with negative discretionary cash flow, i.e., operating cash flow after capital spending and dividends, requiring external funding. However, based on our ongoing conversations with issuers, capital investment plans remain robust (chart 5). Importantly, should current economic conditions significantly weaken from S&P Global Ratings' base-case scenario or regular access to the debt markets subside, utilities would likely need to pull available levers to preserve liquidity and ultimately, credit quality. This could include some form of reduction in capital spending, operating and maintenance costs, and dividends.

Chart 5

Equity Market Accessibility Remains Uncertain

In 2019, North American regulated utilities issued more than $30 billion of equity (chart 6) to finance a portion of their more than $160 billion of capital spending, thereby preserving credit quality. Looking ahead, several companies have assumed equity issuance as part of their 2020 plans, given the industry's high capital spending that we estimate at about $150 billion.

While the capital markets remained mostly accessible to the industry during the first two months of 2020, we anticipate a significant decline in equity issuances over the remainder of 2020 given the level of uncertainty surrounding COVID-19. When combined with our expectation of reduced volumetric sales, increased bad debt expense, and delayed rate case filings, the industry could experience a weakening of credit measures. Given that many companies are already strategically operating with minimal financial cushion at current rating levels, weaker financial measures could lead to credit rating downgrades. This underpins our view for revising our assessment of the North America regulated utility industry to negative from stable (COVID-19: The Outlook For North American Regulated Utilities Turns Negative, April 2, 2020).

Chart 6