Fitch: US Utilities Face Emerging Headwinds to Earnings Growth

NEW YORK--(BUSINESS WIRE)-- Link to Fitch Ratings' Report: A Warm December Caps EPS Growth for U.S. Utilities (2015 Year-End Earnings Calls Wrap-Up)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878932

US utility companies face emerging headwinds to earnings growth driven by weakness in industrial growth and dim outlooks for commodity-sensitive businesses, according to Fitch Ratings. An additional earnings headwind has emerged from the recent five-year extension of bonus depreciation since deferred tax liabilities reduce rate base for most utilities.

Earnings for US utilities moderated in 2015 after robust growth the prior year. Median earnings for Fitch's sample of utilities, power and gas companies grew 3% in 2015 over 2014, a markedly slower pace of growth after the 6% increase in the prior year. Growth investments, rate increases, cost control and lower interest expenses were the key drivers for growth. Earnings in the fourth quarter were affected by the warmest December on record.

A majority of utility companies provided 2016 earnings guidance, the midpoints of which suggests a modest 3% earnings growth over 2015. The strong dollar and subdued global demand has affected electricity sales to industrial sectors such as primary metals, chemicals and paper. Sales to the oil and gas industry have also been affected due to the ongoing cutback in drilling activity. Key credit metrics across the sector remain on track and broadly in line with our expectations.

The debt to EBITDAR ratio worsened marginally for the sector as a whole in 2015, primarily led by leverage creep at the parent holding companies. As merger and acquisition activity remains rampant, we have seen increased use of acquisition debt and a jump in transaction premiums. Regulatory pushbacks that have cast considerable uncertainty around the Exelon-Pepco, Nextera-Hawaiian Electric and Macquarie-Cleco deals further add to uncertainty.

Several managements, in particular those with hybrid business models, reiterated their commitment to maintain strong credit ratings and many of them, including American Electric Power, FirstEnergy Corp., Public Service Enterprise Group and Duke Energy, continue to contemplate a potential exit from competitive generation businesses. Debt paydown has emerged as a key focus for competitive gencos given the pressures on EBITDA and uncertain capital market access for non-investment-grade entities.

The report "A Warm December Caps EPS Growth for U.S. Utilities," dated March 2016, is available on Fitch's website at www.fitchratings.com.

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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View source version on businesswire.com: http://www.businesswire.com/news/home/20160318005630/en/

Fitch Ratings
Shalini Mahajan
Managing Director
U.S. Corporates - Natural Resources and Utilities
Fitch Ratings
+1 212-908-0351
33 Whitehall Street
New York, NY
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
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Source: Fitch Ratings

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