Losing Steam: Weakening Credit Metrics in the North American Utilities Sector

The North American utilities sector has navigated a remarkable set of macroeconomic and geopolitical challenges since the onset of the coronavirus pandemic in 2020. While the industry has demonstrated resilience in weathering these turbulent conditions, there are signs of an overall weakening in credit metrics across the sector and within our portfolio of rated issuers, largely driven by regulatory lag, significant capital needs, and macroeconomic pressures, including

-- The regulatory process for updating authorized Return of Equity (ROE) often moves slowly. Despite significant jumps in interest rates and inflation, the average authorized ROEs for North American electric and gas utilities have seen a minimal increase.
-- The industry's ongoing allocation of substantial capital toward initiatives such as climate adaptation, modernization, and energy transition has reached unprecedented levels, with many utilities rolling out capital expenditure (capex) programs are 10% to 20% greater compared with previous cycles.
-- Macroeconomic pressures related to inflation, interest rates, and bad debt write-offs from affordability concerns continue to have an impact on the credit profiles for utilities. The slower-than-expected moderation in inflation has resulted in revenue shortfalls for a number of utilities because of a lag in incorporating up-to-date inflation factors in rate case submissions.

“Factors such as regulatory lag, elevated capex, and macroeconomic pressures have collectively weakened the sector’s credit metrics,” said Steven Lin, Assistant Vice President. “About 33% of our rated utilities have minimal financial cushions in the "A" rating category and could become more susceptible to negative rating actions. We anticipate most of these companies will be able to maintain their bottom line and benefit from some potential tailwinds, allowing them sustain their credit metrics in the near to medium term.”