As electric utilities complete many of their environmental upgrades, Moody’s expects capital spending is about to peak and then gradually decline, according to a report issued by the ratings service Oct. 22.
Moody’s looked at about 34 utility holding companies and estimated that expenditures will peak at about $70bn in 2013 and dip to $69bn in 2014. The capital spending should then decrease to $65bn in 2015 as many utilities wrap up large projects. Moody’s said 2012 capital spending was roughly $68bn.
The peak in 2013 follows a substantial 25% rise in capital expenditures over the two-year period from 2010 to 2012, Moody’s said in the report. “Although we expect aggregate capital expenditures to decline after 2015, we believe it is very unlikely they will descend as far as the $55 billion trough reached in 2010.”
Moody’s expects about 75% of the companies to see their capital expenditures peak by 2013 or 2014.
“Completion of generation and environmental projects will drive capital investing lower. With fewer large outstanding projects, business risk will decline for many companies,” said Stacy Nemeroff, a Moody’s associate analyst and an author of the report “U.S. Regulated Utilities: Planned Capital Expenditures Set to Fall in 2015, And Modestly Decline Thereafter.”
Falling capital expenditures will improve free cash flow. “One of the primary positive credit impacts of a decline in capital expenditures is the expected improvement in free cash flow which, in turn, should reduce the need for additional debt financing,” said Ryan Wobbrock, a Moody’s assistant vice president and co-author of the report.
“There is still a tremendous need for improved electric transmission, both to replace aging infrastructure and to fully utilize new generation, including renewable which are typically distant from the nearest load centers,” Moody’s said. Several of the companies with planned capital expenditures rising through 2015 are involved in large transmission projects, including Ameren (NYSE:AEE), American Electric Power (NYSE:AEP).
Overall transmission investment in the industry has been projected by the Edison Electric Institute (EEI) to peak in 2013 and then slow down thereafter.
Companies showing the greatest decline in capital expenditures from 2012 and 2015 include NextEra Energy (NYSE:NEE); Cleco (NYSE:CNL); Puget Energy and Westar Energy (NYSE:WR).
For NextEra and Puget, this is related to the completion of large generation projects, whereas Cleco and Westar are finalizing installation of environmental upgrades to comply with Mercury Air Toxic Standards (MATS).
But new environmental standards and other factors could cause capex to start rising again, Moody’s said. A wave of more demanding renewable portfolio standards (RPS) could go into effect over the next several years.
In addition, some companies will continue to build major generation assets in 2015. As a result, Southern (NYSE:SO), SCANA (NYSE:SCG) and Dominion Resources (NYSE:D) will continue to face elevated spending and execution risk in 2015.
“However, for carbon, it looks like companies would not need to begin spending until after the standards are set in 2016 at the earliest,” Moody’s said.
Here are a few highlights from the report:
** Puget recently completed the acquisition and construction of new generation facilities, including the Lower Snake River Wind Facility consisting of 149 wind turbines with a combined generating capacity of 343 MW at a cost of $750m.
** ALLETE (NYSE:ALE) also expects to complete the 200-MW Bison 4 renewable project in 2014.
** Entergy (NYSE:ETR) reached its peak spending in 2012 due in part to the purchase of two gas-fired power plants. Hot Spring was acquired for $253m by Entergy Arkansas and Hinds Energy was acquired for $206m by Entergy Louisiana.
** Black Hills (NYSE: BKH) capital spending will peak in 2013 with the construction of the $237m, 132 MW Cheyenne Prairie Generation Station, to be completed in 2014.
** Subsidiaries of Xcel Energy (NYSE:XEL) and MidAmerican Energy Holdings (MEH) are among the companies rushing to invest in renewables.
Finally, Moody’s reminds clients that utility spending plans are always subject to change.