By retaining relatively open access to the credit and capital markets, U.S. natural gas utilities, investor-owned utilities, interstate pipelines and public power companies should be “relatively unaffected” by any economic slowdown in 2008, according to a report by Fitch Ratings.
The credit ratings agency views the sectors overall as “stable” with a “positive” outlook in the coming year.
“The power and gas sector has retained relatively open access to credit and capital markets since it is viewed as a defensive sector, but credit spreads have widened,” said analysts. “There is ample liquidity.”
Fitch’s outlook “is influenced by high gas inventory as the heating season begins. But in the next several years, demand for gas is likely to rise as a result of increasing reliance on gas as for power generation. Gas price volatility, which has recently been relatively modest. may accelerate once again increasing the risk of gas price spikes in the intermediate and longer term.”
Midstream gas processors appear stable going into 2008, but there is a downside if the price of gas rises and demand for electricity generation grows, Fitch noted. If gas price volatility accelerates, analysts said it would increase the risk of gas price spikes in the intermediate and longer term.
Given the current “robust” fractionation spreads for gas processing, “Fitch’s expectation is that short-term financial performance for virtually all phases of the midstream sector will be strong, although cyclical improvements in margins and cash flow will not necessarily translate into higher credit ratings. Fitch anticipates that midstream services will continue to experience significant new investments and cash flow growth over the near term, consistent with ongoing new investments by upstream producers.”
The interstate pipeline sector also appear is stable because “creditors…continue to benefit from the sector’s generally stable cash flows, moderate to low-risk operations and strong financial performance across the sector. Interstate pipelines demonstrate only limited sensitivities to external factors,” because of fixed-capacity payment obligations of shippers under “volume-insensitive” federally regulated rates. Fitch also expects master limited partnership activity “will continue to be robust in the interstate pipeline and midstream sectors next year.”
For the wholesale power sector, analysts are forecasting electric power reserve capacity margins to decline, “driven by limited new capacity additions and continued increases in power demand ranging from 1% to 2.5% depending on the region. Over the next five years, additions to generating capacity are expected to be relatively limited leading to an expansion of heat rates and spark spreads in most regions.”
One of the key drivers of the near-term outlook for investor-owned utilities is the capital spending on government-mandated transmission reliability and environmental compliance. These expenditures have “a reasonable assurance of timely cost recovery” and will not put a drag on company profits,” said analysts. Strong liquidity is another positive factor.
“While the overall 2008 outlook is stable, there are pockets of higher risk,” said analysts. “Fitch views risks as elevated in restructured states in which the highest cost of generation sets power prices, or is scheduled to begin to set prices following the expiration of rate caps/freezes and states in which rates have been flat for a number of years.” Analysts noted that there has been a legislative debate over retail electric market structure in Ohio, which “is beginning to heat up, and changes in utility law have recently been or are contemplated in Michigan, Pennsylvania, Maryland and Texas.”
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