US regulated utilities outlook for 2019 remains negative

Expectations of stalled cash flow growth stemming from tax reform as well as increasing debt in the US regulated utilities space has prompted Moody’s to maintain its negative outlook on the sector.

In a note to clients, Moody’s said the combination of financial pressures is expected to keep the sector's ratio of funds from operations to debt down around 15% in the year ahead.

"Stagnant cash flow from tax reform and elevated industry leverage from high capital spending will continue to weaken financial metrics in 2019," said Ryan Wobbrock, sector analyst and vice president at Moody’s. 

Following the Tax Cuts and Jobs Act, regulated utilities and their holding companies are losing some of the cash flow contribution that resulted from deferred taxes. 

At the same time, Moody's expects industry leverage to remain elevated. Most regulated utility management teams have reaffirmed targets for capital spending and dividend growth, which will increase debt at a higher rate than cash flow grows.

Some regulatory decisions from 2018, such as increased equity capitalisation allowed in Alabama, Georgia and Texas, will support cash flow generation. Other decisions have allowed utilities to offset liabilities due to the required customer rebates. Certain regulatory decisions, however, offered no new cash flow offsets, or not enough to support historically high leverage metrics.

Several utility holding companies have taken defensive measures like equity issuance, asset sales and capex or dividend reductions to improve cash flow, the agency said. The majority, however, have not taken action to change their negative credit momentum, which underscores Moody's sector outlook.