NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Missouri Regulation: An Improving Story
Fitch Ratings believes the regulatory compact in Missouri has improved in recent years and continues to be a key factor driving the stable credit profiles of the state's investor-owned utilities (IOUs).
This has been driven by constructive rate case outcomes observed over the last five years, where utilities received on average well above 50% of rate request, and the implementation, over time, of favorable regulatory mechanisms, including a fuel adjustment clause that allows recovery of 95% of fuel and purchased power expense, trackers for large operating expenses, and rider for gas infrastructure projects.
Regulatory lag remains a credit concern for IOUs. Regulatory lag primarily stems from the use of historical test years, a prohibition on allowing construction work in progress (CWIP) in rate base, and a rate review period that averages close to 11 months. Recent efforts by the Missouri Public Service Commission to address rate lag is a constructive event, in Fitch's view.
Fitch expects outcomes of pending rate cases to continue to be supportive of IOUs' stable credit profiles. Nonetheless, regulatory fatigue driven by the size of recent base rate increases and frequency of future rate case activity adds some level of regulatory uncertainty, in Fitch's view.
Balanced rate outcomes that allow adequate recovery of capex and efficient cost control measures will be critical to maintaining the IOUs' stable financial profiles. Fitch estimates that combined capex for the largest IOUs will be greater than $4.5 billion over the next five years.
The persistent low interest rate environment has led to modestly lower authorized ROEs in recent years, at levels that are slightly below industry average. In its last rate case completed in Dec. 2012, Union Electric Co., Missouri largest IOU, was authorized a 9.8% ROE, compared with an authorized ROE of 10.1% in its prior rate case. The electric mean industry average ROE was 10.02% in 2013 and 10.17% in 2012. Fitch does not expect authorized ROEs to dip materially below current levels, following completion of pending rate cases.
For more information, please see Fitch's report published today, 'Missouri Regulation: An Improving Story', available on www.fitchratings.com
Additional information is available at 'www.fitchratings.com'.