Fitch Ratings' Outlook for North American energy infrastructure projects in 2012 is Stable according to its report, titled: '2012 Outlook: Energy Infrastructure North America'.
The stable outlook is supported by largely contracted revenue streams mitigating price and volume risk, including continuing strong support for renewable power projects through renewable portfolio standards. However, exposure to merchant market energy and fuel price risk increases cash flow uncertainty for projects across multiple sectors, resulting in negative outlooks for select projects.
"Long-term power purchase contracts underpin many of the projects rated by Fitch," says Gregory Remec, Senior Director in Fitch's Global Infrastructure team in Chicago. "Contracted revenues and an ability to pass through operating costs to investment grade counterparties continue to support stable outlooks for the majority of Fitch's portfolio. Projects reliant on selling power at merchant rates are more susceptible to credit quality erosion."
Fitch notes that vastly increased projections for North American natural gas supply, combined with generally flat demand in a slowly recovering economy, imply an extended period of relatively low gas prices. Conversely, coal prices remain persistently high and have reversed the historical relationship to gas pricing. These relative fuel pricing trends present particular challenges for merchant coal-fired generators selling power at prices typically set by gas-fired assets. Pending environmental compliance regulations will further pressure cash flows for thermal power projects lacking contracts allowing full cost recovery.
Fitch's energy infrastructure ratings were generally stable during 2011, with affirmations for over 70% of monitored ratings. Downgrades comprised 22% of total rating actions, and almost all occurred on ratings carrying a Negative Rating Outlook or Watch. Just over half the downgrades were on projects with significant market pricing exposure for revenues, fuel or both, and remaining downgrades reflected project-specific performance issues across multiple sectors.
Over 70% of the current Rating Outlooks are Stable or Positive. An unexpected improvement in North American economies could lead to increased demand for capacity and energy, improving prices and cash flow for merchant generators. However, slower than expected economic recovery or failure to resolve European economic challenges may prolong currently weak demand and further suppress gas and electricity prices. Timing and magnitude of emissions compliance requirements may also affect 2012 outlooks.
Fitch releases 2012 Outlook for North American energy infrastructure projects