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US regulated utilities will lean on debt to fund cash needs in 2019-20

Publication Date: 19 Dec 2018 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav Sharma (Associate Editor ReachX)
Actionable
Differentiated

Accounting Equity Fundamental Commodity Equity USA Utilities

Regulated US utilities issued an increased amount of equity in 2018 to finance negative free cash flow, bucking historical trends, but a leading rating agency expects sector players to heavily favour long-term debt over equity in 2019 and 2020.

In a recent note to clients, Moody’s said the incremental cash flow generated from deferred taxes, which essentially acted as zero-cost loan, replaced the need to issue higher cost debt or equity capital in 2018. "With tax reform, the loan became due, and utilities responded with higher equity issuance to keep a balanced capital structure," it added. 

Equity will remain a larger part of the industry's capital raise compared to recent years, but Moody's expects debt to again dominate the mix.

Robert Petrosino, Vice President at Moody’s, said the regulated electric and gas industry's free cash flow is perpetually negative due to its high capital intensity, which reflects the need to constantly update facilities to maintain and grow earnings power. 

“As a significant component of equity investors' return proposition, dividends are another significant use of cash for the industry.”

The rating agency expects that regulated electric and gas utilities will issue approximately $23.9bn in equity by the end of 2018 - including forward settlements expected in 2019 - which is only slightly lower than the total equity raised by the industry over the previous three years combined. 

Total new debt raised in 2018 is projected to be $40.8bn, which would represent a 63% debt and 37% equity split.

Looking ahead, Moody's estimates that in 2019 and 2020, the industry will raise $69.8 billion in new debt and $25.1 in equity, reverting back to a split more in line with historical precedent.

 

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