Power lines hang from transmission towers on Torrens Island, South Australia. (Photographer: Carla Gottgens/Bloomberg)

U.S. Utilities Cut to Negative in First as Moody's Warns of Debt

(Bloomberg) -- For the first time ever, Moody’s Investors Service cut its outlook for U.S. utilities to negative, warning that the sector’s debt levels have reached their highest since the financial crisis and may remain there for months.

The sector’s consolidated debt-to-equity ratio has hit the highest level since 2008 as companies finance mergers, acquisitions and other investments in renewable energy and pipelines, Moody’s analysts led by Ryan Wobbrock said in a note Monday. The federal tax overhaul signed by President Donald Trump stands to make matters worse, since utilities that depend on regulated returns are collecting less cash from customers to cover their tax expenses, the ratings firm said.

U.S. Utilities Cut to Negative in First as Moody's Warns of Debt

“Many companies are executing plans to strengthen their balance sheets in the face of increased financial risk,” said Moody’s, which projected that it may take more than 12 to 18 months for the sector’s financial metrics to improve. “Other companies, although faced with negative credit trends, are making no material changes to financial policies.”

The downgrade underscores how a massive buying spree and rising dividends have affected the industry’s debt levels. Power companies have been turning to M&A to fuel growth as demand for electricity weakens and the costs of maintaining their infrastructure rise. The industry racked up a combined $68.2 billion of acquisitions in 2017, the most in a decade, according to data compiled by Bloomberg. Meanwhile, companies including Duke Energy Corp. and Southern Co. have sought to raise billions in equity to make up for revenue losses at their utilities due to the tax changes.

Negative Outlook

The downgrade marks the first time Moody’s has given the regulated utilities sector a negative outlook since it began offering sector outlooks, according to Joe Mielenhausen, a spokesman for the ratings agency.

“High leverage will persist due to growing capital spending and rising dividends,” Moody’s said, while adding that its outlook may change if the sector’s cash flows improve.

Bond prices of some of the country’s biggest utilities have been falling since the start of the year: NextEra Energy Inc.’s 3.55 percent bonds due 2027 have fallen to 96 cents on the dollar, from above 101 cents, according to Trace bond-price data. Duke Energy’s 3.15 percent bonds due 2027 last traded at less than 93 cents, down from as high as 99 cents in early January.

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