News Column

Fitch: U.S. Utilities Face Modest Exposure to Rising Interest Rates

May 8, 2014



NEW YORK--(BUSINESS WIRE)-- U.S. utility companies are well positioned to manage additional cost burdens associated with an inevitable rise in interest rates, according to a new Fitch Ratings report.

The credit profile of the capital-intensive utility sector closely parallels the level and direction of interest rates. A low-rate environment has a salutary effect on a utility's credit profile as the weighted average cost of capital is reduced and revenue requirements under authorized rates of return are lowered. Interest expenses are among the largest nonfuel expense items incurred for utilities.

As short- and long-term rates move higher following the Federal Reserve's completion of tapering, Fitch expects little pressure on corresponding earnings or cash flow. Current marginal financing costs remain below the industry's average interest expense. The industry carries mostly longer-term debt issued during a time of high prevailing interest rates.

Utilities have benefited from the low interest rate environment by rolling maturing debt over. With strong capital market access, utilities have a long lead time to plan expected future financings.

Fitch believes the narrowing window on low interest rates may accelerate the moderate consolidation pace for the industry. Low interest rates have bolstered utility equity valuations, which in turn supported the rising multiples paid for acquisitions. A move to higher financing costs, particularly for leveraged transactions, will likely soften the acquisition pace.

Fitch also notes that the current capital investment cycle is at or near a peak, with environmental upgrades complete or in the latter stages of completion. Weak electricity sales growth forecasts have lowered the need for new generation and transmission, although some transmission and renewable investments will remain elevated.

The full report 'U.S. Utilities: Little Interest to Rising Rates' is available at 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: U.S. Utilities: Little Interest to Rising Rates (Utilities Face Modest Exposure to Rising Interest Rates)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747947

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Glen Grabelsky, +1 212-908-0577

Managing Director

Fitch Ratings, Inc.

33 Whitehall

New York, NY 10001

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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