U.S. utilities face large external funding needs to complete infrastructure investments that may total approximately $200 billion over the next few years, according to a new Fitch Ratings report. Fortunately, the capital markets provide an accommodative environment with utilities enjoying strong access to both the debt and equity markets. As a capital-intensive industry, record low interest rates reduce the development and carrying costs of such investment, and utilities enjoy strong equity valuations reducing the dilutive effects of raising equity.
The utility industry, while historically free cash flow negative, is in the midst of a capital investment cycle that will further stress cash flows. However, the credit risks associated with such a large build-out are manageable within existing ratings as favorable capital market conditions exist and regulatory preauthorized rate base and financing orders are obtained.
Fitch believes utilities have strong liquidity despite the capital intensive of the industry which results in it being free cash flow negative. Utilities have strong capital markets access in even troubled times and attract capital across a broad spectrum of investors and financing channels. Utilities exhibit robust capital structures including secured debt with first mortgage bonds or project-level debt, tax-free debt, and private placements.
The full report 'U.S. Utilities: Insatiable Thirst for Financing' is available at 'www.fitchratings.com'.