Higher interest rates a credit negative for regulated U.S. utilities

federal reserve interes rates elp

U.S. electric utilities will face higher borrowing costs as interest rates rise, which is a credit negative, according to Moody’s Investors Service.

Most utilities, however, are insulated from rising rates by longer-dated debt maturities, the ability to recover costs and the general expectation that rates will rise slowly during the next 12-18 months.

Unregulated utilities are most vulnerable to rising interest rates since they must recoup costs via the market. Regulated utilities can recover interest costs by passing additional costs through to customers, but require regulatory approval before doing so.

Public power companies are the least vulnerable, owing to their ability to raise rates without regulatory approval, Moody’s says.

“Easier cost-recovery methods puts regulated and public power utilities in a more favorable position than other corporates,” Moody’s AVP – Analyst Ryan Wobbrock says.

Utilities with a high percentage of debt maturing over the next two years will be particularly sensitive to interest rate increases in the near term.

Questar Corp (A2 stable), DPL Inc. (Ba3 stable) and Talen Energy Supply (Ba2 negative) are among the most exposed in 2016 based on the total percentage of maturing debt. These liabilities consist of short-term obligations such as commercial paper, bank term loans, and long-term debt maturing by year-end 2016.

In addition, utilities with the highest projected planned capital spending increases for 2016 will feel the brunt of rising rates in their borrowing costs.

For 2016, Hawaiian Electric Co. (Baa1 negative) and WGL Holdings have some of the most significant capital plans to finance, relative to their five-year averages for 2010-14.

Though public power utilities face the least exposure to rising interest rates, those with higher variable rate debt as a portion of total debt will feel the impact of rising interest rates more acutely. Notable public power utilities on this list include Colorado Springs Combined Utility (Aa2 stable), Philadelphia Gas Works (Baa1 stable), and Nebraska Public Power District (A1 stable).

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