Why Utility Bills Payment Relief is a Bad Idea
- Apr 29, 2020 4:53 pm GMT
As the novel coronavirus pandemic wreaks havoc on the economy, utilities are under pressure to provide relief from bills and disconnections for customers. Utility stocks and bonds are safe havens during times of crisis; however, non-paying customers could tip them into volatile territory. Such payment relief could damage utility balance sheets and hamper their access to credit markets.
The Uncertainties of Covid-19 Payment Relief
As I wrote earlier, non-payment of bills from customers is sure to cause a dent in utility balance sheets. The economics of power generation and distribution are further squeezed by market dynamics. The shutdown has ground the economy to a halt, affecting all customers, commercial as well as residential. The overall demand for electricity, which was already falling, is expected to decline further. Some estimates peg that figure to approximately four percent in 2020. In NYC, the pandemic’s epicenter, it could be even more steep with demand declines expected to be approximately 20 percent for the entire year.
Lower demand translates to lower revenues. Decoupling can be used to adjust the mismatch between actual and allowable revenues. Currently 32 states have some form of decoupling policy for either electric or natural gas utilities or, in the case of 17 states, for both.
But there are two problems with laying all your eggs in the decoupled revenue basket. First, the pandemic’s trajectory and timeline are uncertain. A prolonged shutdown could not only hurt utility bottom lines but also affect their credit rating, causing further problems to their ability to raise cash from the markets in the future. Second, decoupling could shift utility debt onto an economy already tipping over into recession and high unemployment figures. Already, GDP in America has plummeted by 4.8 percent in one quarter.
But that figure cannot even begin to capture the full extent of economic damage in places that have been hit the hardest, such as New York City. Some states have begun opening their economy but their approach is measured. As such, it is almost certain that a return to the previous economy could be a marathon rather than a sprint. In the past, typical decoupling revenue adjustments have ranged from one percent to three percent. But the current pandemic is a territory that has not been navigated earlier and losses could be much higher than previously imagined. Is it wise, then, to pass on revenue adjustments to consumers?
Rising Debt and Capital Spending
In recent times, utilities have saddled themselves with more debt and their debt to equity ratio (roughly, the amount of debt divided by the amount of equity) is inching higher after a year of decline.
To make matters worse, capital spending by utilities is also on the rise. It reached $136 billion in 2019. In turn, the net debt levels for utilities in the S&P 500 index rose to an average 5.4 times EBITDA. Five years ago, it was 34 percent of EBITDA. But Covid-19 might postpone utility capital spending plans to next year or even after that, according to Travis Miller at research analyst firm Morningstar.
Meanwhile, analysts worried about rising debt levels have already sounded the alarm. At the end of 2018, Moody’s rated the utility sector as “stable” but most companies within the sector received a “negative” rating.
Maergrethe Amoussou, an analyst at Segall Bryant & Hamill, told Bloomberg that she forecast credit fundamentals for the utility sector, meaning utility credit ratings might be downgraded as companies raise more debt. Moody's has already downgraded debt for Consolidated Edison, among the nation’s biggest utilities, from “stable” to “negative”. Miller from Morningstar had similar concerns. “Utilities with a large share of C&I customers, usage-based rates, and less adaptive rate-making have the most near-term risk both from earnings effects and the ability to implement capital plans,” he wrote. If those C&I customers are granted relief from missed or delayed payments, utilities could find themselves in a revenue bind.
In its latest note, ratings firm Moody's assigned a "stable" rating to the utility sector. But that rating could be revised to negative if the duration of stay-at-home orders and nonessential services closure is extended because it could "lead to more permanent significant loss of load as a result of widespread deteriorating economic activity, customer loss and delayed recovery, negatively affecting cost recovery and liquidity beyond 12-18 months."
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