The record low natural gas prices reported yesterday will continue to
benefit most public power and electric cooperative issuers, Fitch
Ratings says. Fuel and interest costs are among the largest expense
items incurred by public power utilities. Higher interest rates could
offset some of the price benefits over the long term. Yesterday's rate
action should have only limited effects in the near term.
We expect low natural gas prices to support strong operating margins and
provide headroom for rate increases necessary to mitigate other
escalating costs and, in some cases, lower total charges to ratepayers.
On Tuesday, natural gas prices fell to levels last seen in 1999. Fitch
lowered its 2016 forecast assumption for US natural gas earlier this
year to $3.25/mcf, reflecting increasingly efficient US shale production
and lagging demand growth. Fitch's longer term price forecast was
lowered to $3.75/mcf from $4.50/mcf, with stress case prices falling
below $3.00/mcf in most years. Operating efficiencies have also driven
Fitch's 2016 base case price for crude oil to $60/bb. Although oil-fired
generation accounts for less than 1% of total US energy production,
prices will continue to influence natural gas fundamentals and, to a
lesser extent, electricity consumption.
Yesterday the Federal Open Market Committee voted to set the new target
range for the federal funds rate at 0.25% to 0.5%, and forecasted a rate
of 1.375% by the end of 2016. Short-term rates at this level will not
have an impact on public power issuers as the median ratio of variable
rate debt to total debt totals only 9.0% for the entire Fitch-rated
portfolio of public power issuers. Nearly all of the debt issued
throughout the sector since 2009 has been fixed rate, including 98% of
2015 issuance through June.
Although a steep, unexpected rise from current levels remains a longer
term concern for the sector, prudent hedging strategies typically
adopted by most public power issuers and relatively stable capital
structures should protect margins and coverage metrics against any
sudden upward price movement over the near term.
For more information, see "2016 Outlook: U.S. Public Power and Electric
Cooperative Sector," available 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/20151217006102/en/
Copyright Business Wire 2015
Source: Business Wire
(December 17, 2015 - 11:45 AM EST)
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