NEW YORK--(BUSINESS WIRE)--Generally supportive regulatory compacts, sustained low interest rates, beneficial commodity environment, and efficient cost control are key drivers of the strong financial performance of the US utilities, power and gas (UPG) sector, according to Fitch Ratings.
Leverage metrics have remained relatively stable in 2013 and for the first half of 2014 while interest coverage metrics have modestly improved and Fitch expects this trend to continue for the remainder of the year. Barring a renewal of bonus depreciation and other government tax stimulus programs that boosted industry cash flows and contributed to higher capital spending in prior years, we expect cash flow measures of UPG issuers to return to more normalized levels.
The credit profile of the capital-intensive utility industry is closely correlated to the level and direction of interest rates. Fitch believes the low rate environment has had a salutary effect on the sector's credit profile. Refinancing of matured debt at lower interest rates has created sufficient headroom in coverage metrics such that an eventual rise in rates should raise limited credit concerns over the short-to-medium term. The long-term downward trend in authorized returns on equity (ROE) is stabilizing at or near current levels, in Fitch's opinion. Fitch sees a correlation between a company's overall credit profile and the level of authorized and earned ROE.
Fitch projects industry capex to remain elevated over the next few years, driven largely by ongoing investments in utility base infrastructure, transmission investments, and renewable projects to meet regulatory mandates. Continued regulatory support with adequate and timely recovery of capex will continue to be critical to maintaining the credit quality of UPG issuers, in Fitch's view.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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